UNIVERSITY  OF  CALSFO- 
AT   LOS  ANGELES 


IX 


^ 


The  Romance  and  Tragedy 

of  Banking 


Problems  and  Incidents  of  Governmental 
Supervision  of  National  Banks 


By 
THOMAS  P.  KANE 

Deputy  Comptroller  of  the  Currency 


VOLUME  1 


NEW  YORK 
THE  BANKERS  PUBLISHING  CO. 
1922 


a    9 


1»         3 


Copyright,  1922,  by 
The  Bankers  Publishing  Co. 


WARREN    PUBLICATIONS    PniSS 
tAManiOGt.   MASS..   U.  8     A 


•  •    • 


I  \^ 


iL  \  0  '^ 


TO  MY  ASSOCIATES  AND  CO-WORKERS  IN  THE  OFFICE 

OF    THE    COMPTROLLER    OF     THE    CURRENCY, 

AND  IN  THE  FIELD  SERVICE,  THIS  BOOK 

IS    AFFECTIONATELY    DEDICATED 


nR^923 


CONTENTS 


Page 

INTRODUCTION  --------         i 

CHAPTER  I.— THE   NATIONAL  BANK  ACT  AND   ITS 

ORIGIN  - 6 

Origin  and  passage  of  the  National  Bank  Act. 

CHAPTER  II.— THE  CURRENCY  BUREAU  -    -    -   18 

Organization  of  the  National  Currency  Bureau — Tenure  of  office  of 
the  Comptroller  of  the  Currency — Composition  of  the  Currency 
Bureau — National  Bank  Circulation  first  printed  under  contract — 
Profit  to  Government  from  circulation  more  than  entire  cost  of 
bureau. 

CHAPTER    III.— HUGH    xMcCULLOCH      -         -         -         -       28 
Biography  of  Hugh  McCulloch,  the  first  Comptroller  of  the  Cur- 
rency— McCuUoch's  annual  reports — McCuUoch's  circular  letter  to^ — • 
the  banks — McCuUoch's  appointment  as  Secretary  of  the  Treasury 
— Selection  of  McCulloch  to  organize  the  bureau — First  national 
bank  organized. 

CHAPTER  IV.— FREEMAN  CLARKE         -         -         -         .       35 

Biography  of  Freeman  Clarke — First  failure  of  a  national  bank — 
Clarke's  annual  report  to  Congress — Bank  failures  during  Clarke's 
administration — Failure  of  the  Venango  National  Bank  of  Frank- 
lin, Pennsylvania — Proposed  removal  of  the  bureau  to  New  York. 

CHAPTER  v.— HILAND   R.   HULBURD   -         -         -        -       47 

Biography  of  Hiland  R.  Hulburd — Payment  of  interest  on  bank 
balances — Operation  of  the  Reserve  laws — National  Bank  Circula- 
tion vs.  Government  Issues — Bank  note  redemption  agency — 
,^_^  Instances  of  theft  in  connection  with  currency  shipments— Great 
Chicago  fire  of  1871  and  its  effect  upon  the  banks — Bank  failures 
during  Hulburd's  administration — Amendments  to  the  laws 
enacted. 


V 


CONTENTS 

Page 
CHAPTER  VX.— JOHN  J.  KNOX         -  -         -       71 

Biography  of  John  Jay  Knox — Knox's  annual  reports — Panic  of 
1873  and  its  causes — R^umption  of  specie  payments — The  Freed- 
mans  Savings  and  Trust  Company — Real  estate  loans  by  national 
banks — Interpretation  of  the  banking  laws — Banking  conducted 
on  widely  different  lines  than  formerly — Bank  failures  during 
Knox's  term — Fauure  of  the  National  Bank  of  the  State  of 
Missouri — Charges  preferred  against  Knox  by  United  States 
Attorney — Knox's  reply  to  charges — Failure  of  the  First  National 
Bank  of  Washington,  D.  C,  and  of  Jay  Cooke  &  Company — 
Inadequacies  of  the  law  and  recommendations  for  amendments 
— Amendments  to  the  law  enacted. 

CHAPTER  VII.— HENRY  W.  CANNON  -    -    -    -  115 

Biography  of  Henry  W.  Cannon — Panic  of  1884 — Cause  of  the 
financial  troubles  of  1884 — Failure  of  the  Marine  National  Bank — 
Failure  of  the  brokerage  firm  of  Grant  &  Ward — Legislation 
recommended.  z^**..— — 

CHAPTER  VIII.— WILLIAM  L.  TRENHOLM  -  -  -  181 
Biography  of  William  L.  Trenholra — Unprecedented  reduction  in 
circulation — Trenholm's  circular  letter  to  the  banks — Plan  for 
National  Currenc^_^eform — Failure  of  the  Fidelity  National 
Bank — Peculiar  construction  of  the  law — Criticism  of  official 
supervision  of  the  banks — The_ -Chicago  wheat  deal — Suggested 
amendments  to  the  law — Heterogeneous  currency  system — 
Amendments  to  the  law. 


CHAPTER  IX.— EDWARD  S.  LACEY         -         -         -         "v^Sl 

Biography  of  Edward  S.  Lacey — Monetary  stringency  of  1890-^ 
Failures  during  Lacey's  administration — Failure  of  the  Keystone 
National  Bank — Failure  of  the  Spring  Garden  National  Bank — 
Failure  of  the  Maverick  National  Bank — Necessity  for  some  lim- 
itation on  the  discount  of  cflu wicrfeiaL J* ap e r — Suggested  amend- 
ments to  the  law. 


> 


CHAPTER  X.— A.  BARTON  HEPBURN  -    -    -    -  173 

Biography  of  A.  Barton  Hepburn — National  bank  failures  dur- 
ing Hepburn's  administration — P'ailure  of  the  National  Bank  of 
Guthrie,  Oklahoma — Annual  report  of  Hepburn — Amendments  to 
theTaw  recommended. 


VI 


CONTENTS 

I  Page 

CHAPTER  XI.— JAMES  H.  ECKELS  -  -  f  -  -  -  187 
Biography  of  James  H.  Eckels — Panic  ^f  1893 — ITie  model 
receiver — Ex-convict  receiver  and  examiner — Suspensions  during 
the  panic  of  1893 — Shrinkage  in  assets  and  liabilities — Cause  of  the—^ 
panic  of  1893 — Most  important  bank  failures  during  the  panic  of 
1893 — The  ;^imri  Dwiggins  chain  of  banks — The  Chemical  National 
Bank  and  its  branch  in  the  Exposition  grounds  at  Chicago — The 
National  Bank  of  Kansas  City,  Missouri — Failure  of  the  National 
Bank  of  Illinois — Amendments  to  the  law  recommended. 


CHAPTER  XII.— CHARLES  G.  DAWES     -         -         -         -     215 

Biography  of  Charles  G.  Dawes — Liquidation  of  receiverships — 
Second  assessment  of  stockholders — National  bank  failures  during 
Mr.  Dawes'  administration — Failure  of  the  Globe  National  Bank — 
Defalcation  in  the  First  National  Bank  of  New  York  City — The 
Currency__i,aws — Prefcnnent  of  stockholder  to  depositor — Cur- 
rency legislation  suggested — Amendments  to  the  laws  recom- 
mended by  Mr.  Dawes — Reserve  Cities  with  a  population  of 
25,000 — Amendment  to  the  banking  laws  enacted. 


CHAPTER  XIII.— WILLIAM   B.   RIDGELY       -         -         -     243 

Biography  of  William  B.  Ridgely — Extension  of  corporate  exist- 
ence of  national  banks — Robbery  of  the  Merchants  National  Bank 
>.  of    Lowell,    Massachusetts — The    Baltimore    and    San    Francisco 
~*s4  fires — Failure    of    the    Chicago    National    Bank — Legality    of    the 

>  action  of  the  Clcarin£_Jifliise  .Banks — Indictment,  trial  and  con- 
viction of  John  R.  Walsh — The  Bigelow  defalcation — Culpability 
of  the  bank  examiner — Bank  failures  during  Mr.  Ridgely's 
administration — The  failure  of  the  Citizens  National  Bank  of 
Oberlin,  Ohio — The  celebrated  Cassie  A_.  Chadwick— The  Andrew 
Carnegie  notes — Obligations  of  Directors — Failure  of  the  National 
Bank  of  North  America  and  the  Amsterdam  National  Bank  of 
New  York  City — Indictment,  trial  and  conviction  of  Charles  W. 
Morse — Trial  and  acquittal  of  F.  Augustus  Heinze,  indicted  on  the 
same  charges — Failure  of  the  Farmers  and  Drovers  National  Bank 
of  Waynesburg,  Pennsylvania — Ridgely's  policies  of  administration 
— The_^crisis  ofJ[,9p,2:r-Failure  of  the  Aetna  Banking  and  Trust 
Company"of  Butte,  Montana,  and  branch  at  Washington,  D.  C. — 
Secretary  Shaw's  ruling  in  regard  to  reserve  requirements — Brief 
panicia_AVall  Street — Life  of  receiverships — Ridgely's  annual 
reports — Amendments  to  the  banking  laws. 


Vll 


ILLUSTRATIONS 


Pag* 

Thomas  P.  Kane    -         -         -         -----         -         1 

Hugh  McCulloch  -         -         -----       28 

Freeman  Clarke    -         -         -         -         -         -         -  -85 

HiLAND    R.    HULBURD  ------47 

John  Jay  Knox     -         -         -         -         -         -         -         -         -71 

Henry  W.  Cannon         -         -         -         -         -         -         -         -115 

William  L.  Trenholm  -         -         -         -         -         -         -         -181 

Edward  S.  Lacey  -         -         -         -         -         -         -         -         -151 

A.  Barton  Hepburn        --------      173 

James  H.  Eckels    --------     187 

Charles  G.  Dawes  --------     215 

William  B.  Ridgely        -         -  -  -         -  -         -     243 

Cassie  Chadwick    -----  -     263 

Assignment   of  the  $500,000   Note  264 

Bogus  Trust  Agreement         -------      264 

Assignment  of  the  $250,000  Note         -  -  -  -     264 

Forged  Carnegie  Note  for  $250,000  -  -         -     266 

Forged   Carnegie   Note   for  $500,000  -  266 


Vlll 


THOMAS  P.  KANE 
Deputy  Comptroller  of  the  Currency 


INTRODUCTION 

SOME  years  ago  at  a  banquet  given  by  the  Bankers'  Associa- 
tion of  the  District  of  Columbia,  I  sat  next  to  an  eminent 
jurist  of  the  District  Bar.  During  the  course  of  the  evening 
our  conversation  drifted  to  the  subject  of  the  Currency  Bureau 
and  its  management,  and  after  relating  to  him  some  of  the  difficul- 
ties and  situations  which  frequently  confront  the  Comptroller  of 
the  Currency  in  his  supervision  of  the  national  banks,  he  remarked 
that  there  must  have  come  to  my  knowledge  during  my  long  con- 
nection with  the  service  many  incidents  similar  to  those  related 
which  would  make  a  very  interesting  narrative  if  assembled  in 
book  form. 

This  suggestion,  therefore,  is  responsible  for  the  publication 
of  this  volume,  and  is  my  apology  for  writing  it.  It  is  not  an 
essay  on  banking  and  currency,  nor  a  discussion  of  financial  or 
economic  theories.  It  is  simply  a  narrative  of  events  of  more  or 
less  importance  and  interest  in  the  history  of  the  National  Cur- 
rency Bureau  with  some  original  deductions  and  comments.  It 
contains  many  unvarnished  truths,  plainly  told,  with  no  attempt 
at  literary  excellence.  It  deals  with  men  and  measures,  methods 
and  motives  in  connection  with  the  administration  of  the  bureau, 
with  no  intention  of  contrasting  one  administration  with  another 
or  of  drawing  invidious  distinctions  between  them.  It  endeavors 
to  right  some  wrongs  where  injustice  has  been  done  and  to  correct 
some  erroneous  impressions  as  to  the  powers  and  duties  of  the 
Comptroller  of  the  Currency. 

In  May,  1886,  I  was  tendered  and  accepted  the  position  of 
Secretary  to  the  Comptroller  of  the  Currency,  by  William  L. 
Trenholm,  of  South  Carolina,  who  a  month  previously  had  been 
appointed  Comptroller.  I  was  sworn  in  and  entered  upon  the  dis- 
charge of  my  duties  May  16,  1886. 

Thus  began  a  period  of  service  in  the  Bureau  of  the  Currency, 
which  continued  uninterruptedly  for  more  than  thirty-six  years, 
undisturbed  by  political  or  other  changes  in  Federal,  depart- 
mental or  bureau  administration. 

1 


2  ROMANCE  AND  TRAGEDY  OF  BANKING 

What  little  measure  of  success  I  may  have  attained  in  the 
bureau  with  which  I  have  been  connected  so  long,  I  owe  wholly  to  a 
faithful  and  conscientious  discharge,  to  the  best  of  my  ability, 
of  such  duties  as  were  assigned  to  me  from  time  to  time  in  the 
various  positions  which  I  held,  and  to  an  appreciation  of  ray  serv- 
ices by  all  of  the  official  superiors  under  whom  I  have  had  the 
honor  to  serve,  and  whose  confidence  and  esteem,  I  am  proud  to 
say,  I  possessed  to  the  fullest  extent  during  their  respective  terms 
of  office  and  since  their  retirement  from  the  service,  with  a  single 
exception. 

It  has  been  my  privilege  and  my  pleasure  to  know  personally 
every  Comptroller  of  the  Currency  from  Hugh  McCulloch,  who 
organized  the  bureau  in  1863,  and  was  its  first  Comptroller,  down 
to  the  present  Comptroller,  Mr.  Crissinger,  with  the  exception  of 
Freeman  Clarke  and  Hiland  R.  Hulburd,  the  second  and  third 
Comptrollers,  and  to  have  served  five  of  them  in  the  confidential 
capacity  of  secretary.  These  five  were  William  L.  Trenliolm, 
Edward  S.  Lacey,  A.  Barton  Hepburn,  James  H.  Eckels  and 
Charles  G.  Dawes — two  Democrats  and  three  Republicans.  Upon 
the  recommendation  of  Mr.  Dawes,  I  was  appointed  Deputy 
Comptroller  on  June  29,  1899,  to  succeed  Lawrence  O.  Murray. 

When  Mr.  Murray  resigned  as  Deputy  Comptroller,  Mr. 
Dawes,  who  was  then  Comptroller,  was  absent  in  the  West.  Some 
of  the  chiefs  of  division  and  others  connected  with  the  Comptrol- 
ler's office  were  applicants  for  the  place,  and  requested  me  to 
recommend  them  to  Mr.  Dawes  for  appointment  to  the  vacancy. 
I  wrote  to  Mr.  Dawes  at  Chicago,  advising  him  of  Mr.  Murray's 
resignation,  who  were  applicants  for  the  vacancy,  and  what  I 
knew  of  their  relative  merits  and  qualifications.  The  only  reply  I 
received  from  him  was  a  request  to  ask  Mr.  Murray  not  to  make 
public  his  resignation  until  he  returned  to  Washington.  The 
morning  following  Mr.  Dawes'  return  I  met  one  of  the  applicants 
in  the  corridor  of  the  Treasury  Department,  who  had  spent  the 
evening  before  at  Mr.  Dawes'  house  and  inquired  of  him  who  was 
to  be  the  new  deputy.  He  replied  that  while  he  knew,  he  was  not 
at  liberty  to  say,  but  that  I  would  learn  as  soon  as  Mr.  Dawes 
came  to  the  office.  When  Mr.  Dawes  arrived  at  the  office  he  said 
to  me  on  entering  the  room :  "Get  me  a  stenographer,  I  want  to 


ROMANCE  AND  TRAGEDY  OF  BANKING  3 

dictate  a  letter  to  the  Secretary  of  the  Treasury."  As  I  had 
always  done  his  stenographic  correspondence  I  thought  the 
request  unusual,  but  sent  for  one  of  the  office  stenographers.  Mr. 
Dawes  commenced  his  letter  to  the  Secretary  by  informing  him  of 
the  resignation  of  Mr.  Murray  and  concluded  by  recommending 
me  for  the  vacancy.  I  was  completely  surprised  when  I  heard 
my  name  mentioned,  and  told  Mr.  Dawes  that  I  was  not  an  appli- 
cant for  the  place  and  had  not  thought  of  myself  in  connection 
with  it.  He  replied  that  that  was  one  of  the  reasons  why  he 
had  recommended  me,  and  the  other  was  that  he  believed  me  to  be 
better  qualified  for  the  place  than  any  one  of  those  who  had 
applied  for  it. 

This  brief  narrative  of  how  I  became  connected  with  the 
Bureau  of  the  Currency  and  my  subsequent  advancement  grade 
by  grade  to  the  second  position  in  rank  in  the  bureau,  many  times 
and  for  long  periods  acting  as  its  head,  is  not  presented  in  any 
spirit  of  egotism,  but  simply  as  an  introduction  to  what  follows  in 
the  line  of  reminiscences  of  the  bureau  and  a  discussion  of  the 
principal  events  of  each  administration  since  the  establishment  of 
the  national  banking  system,  viewed  at  short  range  from  the  van- 
tage ground  of  the  opportunities  afforded  by  thirty-six  years* 
connection  with  the  Comptroller's  office,  a  close  association  with 
nine  Comptrollers,  and  a  personal  acquaintance  with  all  of  the 
Comptrollers  but  two  since  the  Currency  Bureau  was  established. 

THOMAS  P.  KANE. 

Washington,  October,  1922. 


CHAPTER  I 

The  National  Bank  Act  and  Its  Origin 

IT  never  has  been  definitely  determined  who  is  entitled  to  the 
most  credit  for  having  originated  the  National  Bank  Act, 
Like  all  important  instruments  of  this  character,  it  is  con- 
ceded to  be  the  product  of  several  minds.  It  was  originally  a  war 
measure,  and  grew  out  of  the  urgent  necessities  of  the  Government 
to  replenish  the  public  treasury  by  creating  a  market  for  its  bonds 
through  the  inducement  offered  banks  to  obtain  circulation  based 
upon  the  security  of  such  bonds.  The  paramount  purpose  of  the 
Act  was  to  secure  a  uniform  national  banking  system  of  currency, 
without  the  creation  of  a  great  central  institution  like  the  old 
United  States  Bank.  Opposition  to  such  an  institution  was  wide- 
spread and  deep-seated  and  the  sponsors  of  the  various  plans 
which  took  final  shape  in  the  National  Banking  Act  were  careful 
to  point  out  that  the  objections  to  the  United  States  Bank  had 
been  duly  considered  and  had  been  avoided  by  them. 

In  August,  1861,  O.  B.  Potter  of  New  York  submitted  to  the 
Secretary  of  the  Treasury  a  scheme  to  permit  state  banks  and 
bankers  to  issue  notes  secured  by  United  States  bonds.  He  said 
that  none  of  the  objections  urged  against  a  United  States  bank 
could  lie  against  the  plan  proposed.  It  would  give  to  the  Govern- 
ment no  power  to  bestow  favors  and  would  not  place  a  dollar  in 
the  Government's  hands  to  lend.  It  was  impossible,  there- 
fore, it  was  claimed,  to  see  how  such  a  system  could  be  made  use 
of  for  political  ends. 

Samuel  Hooper,  a  member  of  the  House  of  Representatives 
from  Massachusetts,  who  was  an  active  agent  in  the  attainment 
of  the  end  sought,  said  in  support  of  one  of  the  early  measures 
proposed,  which  did  not  become  a  law,  that  it — 

secured  all  the  benefits  of  the  old  United  States  Bank 
without  many  of  those  objectionable  features  which  aroused 
opposition.     It  was  affirmed  that,  by  its  favors,  the  govern- 


6  ROMANCE  AND  TRAGEDY  OF  BANKING 

ment  enabled  that  bank  to  monopolize  the  business  of  the 
country.  Here  no  such  system  of  favoritism  exists  *  *  * 
It  was  affirmed  that  frequently  great  inconvenience  and 
sometimes  terrible  disaster  resulted  to  the  trade  and  com- 
merce of  different  localities  by  the  mother  bank  of  the 
United  States  arbitrarily  interfering  with  the  management 
of  the  branches  by  reducing  suddenly  their  loans  and  some- 
times withdrawing  large  amounts  of  their  specie,  for  poli- 
tical effect.  Here  each  bank  transacts  its  own  business 
upon  its  own  capital,  and  is  subject  to  no  demands  except 
those  of  its  own  customers  and  its  own  business.  It  will 
be  as  if  the  bank  of  the  United  States  had  been  divided  into 
many  parts,  and  each  part  endowed  with  the  life,  motion, 
and  similitude  of  the  whole,  revolving  in  its  own  orbit, 
managed  by  its  own  board  of  directors,  attending  to  the 
business  interests  of  its  own  locality ;  and  yet  to  the  bills  of 
each  will  be  given  as  wide  a  circulation  and  as  fixed  a 
value  as  were  given  to  those  of  the  Bank  of  the  United 
States  in  its  palmiest  days. 

In  the  National  Banking  Act  as  passed  in  1863  it  was  believed 
that  the  desired  result  had  been  obtained. 

As  far  back  as  the  days  of  Alexander  Hamilton  and  Albert 
Gallatin,  the  question  of  creating  a  uniform  state  bank  currency 
was  frequently  discussed,  but  none  of  the  plans  of  the  distin- 
guished financiers  of  those  days  seemed  to  contemplate  govern- 
mental assumption  of  responsibility  for  the  redemption  of  such 
note  issues. 

Secretary  Dallas  in  1813  advocated  a  uniform  state  bank  cir- 
culation with  governmental  supervision  of  the  banks,  and  many  of 
the  features  of  his  plan  were  similar  to  those  contained  in  the 
National  Bank  Acts  of  1863  and  1864. 

In  1837,  the  State  of  Michigan  adopted  a  banking  law  which 
required  the  banks  to  deposit  with  the  State  Government  bonds 
and  mortgages  as  security  for  their  circulating  notes,  but  this  law 
was  subsequently  declared  by  the  State  courts  to  be  unconstitu- 
tional. 

The  Free  Banking  Law  adopted  by  the  State  of  New  York  in 
1838  was  also  analogous  to  the  national  banking  laws,  and  many 
of  the  provisions  of  the  latter  were  taken  therefrom.     There  was 


ROMANCE  AND  TRAGEDY  OF  BANKING  7 

one  radical  difference,  however,  between  the  State  and  the 
National  law  in  respect  to  circulation.  While  the  State  law 
required  security  for  circulation  to  be  deposited,  the  State  gov- 
ernment did  not  guarantee  or  assume  responsibility  for  the  re- 
demption of  the  circulation  beyond  the  amount  realized  for  the 
securities  held  when  sold. 

In  his  annual  report  for  1861,  Secretary  Chase  suggested  two 
plans  for  providing  the  country  with  a  circulating  medium.  The 
first  contemplated  the  gradual  retirement  from  circulation  of  the 
notes  of  private  corporations  and  the  issue  in  their  stead  of 
United  States  notes,  payable  in  coin,  on  demand,  in  amounts  suf- 
ficient to  meet  the  business  needs  of  the  country. 

The  second  plan  contemplated  the  preparation  by  the  Gov- 
ernment and  delivery  to  banking  institutions  for  circulation, 
under  governmental  supervision,  of  notes  to  be  secured  by  a 
pledge  of  United  States  bonds. 

Secretary  Chase  urged  the  adoption  of  one  or  the  other  of 
these  plans  as  a  measure  of  currency  reform  and  as  a  means  of 
replenishing  the  public  treasury.  He  stated  the  principal  features 
of  the  second  plan  to  be  as  follows : 

First.  A  circulation  of  notes  bearing  a  common  im- 
pression and  authenticated  by  a  common  authority. 

Second.  The  redemption  of  these  notes  by  the  associa- 
tion and  institution  to  which  they  may  be  delivered  for 
issue. 

Third.  The  security  of  redemption  by  the  pledge  of 
United  States  stocks   and  an  adequate   provision   of   specie.  . 

Without  undertaking  to  outline  in  detail  either  plan.  Secre- 
tary Chase  expressed  the  hope  that  Congress  would  give  the  latter 
suggestion  careful  consideration,  as  he  believed  it  would  not  only 
furnish  the  country  with  a  safe  and  uniform  circulating  medium, 
but  would  impart  such  value  and  stability  to  government  securi- 
ties as  would  make  it  possible  to  obtain  the  additional  loans  re- 
quired by  the  Government  at  fair  and  reasonable  rates,  especially 
if  the  public  credit  were  supported  by  sufficient  and  certain  pro- 
vision for  the  payment  of  interest  thereon  and  the  ultimate 
redemption  of  the  principal. 


8  ROIVLANCE  AND  TRAGEDY  OF  BANKING 

The  first  plan  suggested  by  Secretary  Chase  in  his  report  for 
1861,  was  evidently  based  upon  the  assumption  that  the  war  was 
to  be  of  short  duration,  and  while  this  plan  had  already  been 
partly  adopted  by  the  authorization  of  the  issue  of  Treasury 
notes,  it  soon  became  manifest  to  the  Secretary  that  the  possibili- 
ties of  disaster  which  might  result  from  a  continuance  of  this 
expedient  outweighed  any  advantage  that  could  be  derived  there- 
from. He  therefore  renewed  in  his  report  for  1862  the  recom- 
mendation he  made  in  his  report  of  the  previous  year  for  the 
enactment  of  a  national  banking  law,  and  recounted  the  benefits 
to  be  derived  by  the  Government  and  the  people  from  the  issue  of 
a  banknote  currency  of  uniform  design  and  value,  based  upon  the 
credit  of  the  nation,  setting  forth  at  the  same  time  his  objections 
to  the  issue  of  United  States  notes  as  a  permanent  system  of 
circulation. 

The  Secretary's  report  was  referred  by  the  House  of  Repre- 
sentatives to  the  Committee  on  Ways  and  Means  and  by  that 
Committee  to  a  sub-committee  composed  of  Hon.  E.  G.  Spaulding 
of  New  York,  chairman;  Mr.  Hooper  of  Massachusetts,  and  Mr. 
Corning  of  New  York. 

A  national  bank  bill  was  drafted  by  Mr.  Spaulding  in  Decem- 
ber, 1861,  and  reported  to  the  full  committee  for  consideration, 
but  so  much  opposition  to  the  measure  was  developed  in  com- 
mittee at  that  time  that  it  failed  to  receive  favorable  action.  In 
the  first  place,  it  was  not  believed  that  a  bill  of  that  nature  could 
be  passed  without  a  prolonged  discussion,  and,  in  the  second  place, 
if  it  did  pass,  it  was  not  thought  that  it  could  be  made  available 
quickly  enough  to  afford  the  Government  the  relief  it  so  urgently 
needed  to  meet  the  expenses  of  the  war.  The  attempt,  therefore, 
appears  to  have  been  temporarily  abandoned  by  Mr.  Spaulding, 
who  introduced  instead  the  Legal  Tender  Act  of  February  25, 
1862. 

On  July  11,  1862,  Mr.  Hooper  introduced  in  the  House  of 
Representatives  a  bill  to  provide  a  "National  currency  secured 
by  a  pledge  of  United  States  stocks,"  etc.,  and  received  authority 
by  resolution  of  the  House  to  have  printed  a  limited  number  of 
copies  of  this  bill. 


ROMANCE  AND  TRAGEDY  OF  BANKING      9 

On  February  2,  1863,  a  bill  was  reported  to  the  Senate  from 
the  Finance  Committee  by  Senator  Sherman,  entitled  "An  Act  to 
provide  a  national  currency,  secured  by  a  pledge  of  United  States 
bonds,  and  to  provide  for  the  circulation  and  redemption  thereof." 
This  was  the  same  bill,  with  some  changes  in  details,  that  was 
introduced  in  the  House  of  Representatives  by  Mr.  Hooper  sev- 
eral months  previously. 

In  reporting  this  bill  to  the  Senate,  Senator  John  Sherman 
said: 

We  are  about  to  choose  between  a  permanent  system, 
designed  to  establish  a  uniform  national  currency  based 
upon  the  public  credit,  limited  in  amount,  and  guarded 
by  all  the  restraints  which  the  experience  of  men  has 
proved  necessary,  and  a  system  of  paper  money  without 
limit  as  to  amount,  except  for  the  growing  necessities 
of  war.  In  the  consideration  of  such  a  question,  we  should 
surely  sacrifice  all  local  interests,  all  pride  of  opinion  and 
while  acting  promptly  under  the  pressure  of  events,  we 
should  bring  to  our  aid  all  the  wisdom  of  united  coun- 
sels and  all  the  light  which  the  experience  of  former  gen- 
erations of  men  can   give  us. 

Referring  at  the  same  time  to  the  expedient  previously  re- 
sorted to,  of  issuing  United  States  notes,  he  said : 

Another  practical  objection  to  these  United  States 
notes  is,  that  there  is  no  mode  of  redemption.  They  are 
safe.  They  are  of  uniform  value,  but  there  is  no  mode 
pointed  out  by  Avhich  they  are  to  be  redeemed.  No  one 
is  bound  to  redeem  them.  They  are  receivable  but  not  con- 
vertible. They  are  debts  of  the  United  States,  but  they 
cannot  be  presented  anywhere  for  redemption.  No  man  can 
present  them,  except  for  the  purpose  of  funding  them  into 
the  bonds  of  the  United  States.  They  are  not  convertible. 
They  lack  that  essential  element  of  any  currency.  They 
can  only  be  used  during  the  war.  The  very  moment  that 
peace  comes,  all  tliis  circulation  that  now  fills  the  channels 
of  commercial  operations  will  be  at  once  banished.  They 
will  be  converted  into  bonds,  and  then  the  contraction  of 
prices  will  be  as  rapid  as  the  inflation  has  been.     The  issue 


10  ROMANCE  AND  TRAGEDY  OF  BANKING 

of  government  notes  can  only  be  a  temporary  measure,  and 
is  only  intended  as  a  temporary  measure  to  provide  a  nation- 
al currency. 

But,  it  is  asked,  why  look  at  all  to  the  interests  of  the 
banks?  Why  not  directly  issue  the  notes  of  the  government, 
and  thus  save  to  the  people  the  interest  on  the  debt  rep- 
resented  by  the  notes   in   circulation? 

The  only  answer  to  this  question  is  that  history  teaches 
us  that  the  public  faith  of  a  nation  alone  is  not  sufficient  to 
maintain  a  paper  currency.  There  must  be  a  combination 
between  the  interests  of  private  individuals  and  the  govern- 
ment. 

After  debating  this  bill  for  ten  days,  it  passed  the  Senate  by 
a  vote  of  23  ayes  to  21  nays.  And,  but  for  the  personal  appeals 
made  for  the  bill  by  Secretary  Chase  and  Senator  Sherman,  it 
undoubtedly  would  have  failed  of  passage  in  the  Senate,  as  Sen- 
ator Anthony  was  known  to  be  opposed  to  it,  and  Senator  Sher- 
man says  in  "John  Sherman's  Recollections"  that  "Senator  An- 
thony voted  for  the  bill  because  Secretary  Chase  convinced  him 
that  it  was  necessary  to  carry  on  the  war." 

After  passing  the  Senate,  the  bill  went  to  the  House  of  Repre- 
sentatives, where  it  remained  on  the  Speaker's  table  from  the 
12th  to  the  19th  of  February,  a  motion  to  refer  it  to  the  Com- 
mittee of  the  Whole  having  been  defeated. 

Mr.  Spaulding,  who  is  credited  with  having  prepared  the 
original  draft  of  the  bill,  opened  the  debate  upon  it  in  the  House, 
and  in  the  course  of  a  long  speech  said : 

I  shall  vote  for  it,  not  that  it  would  afford  any  con- 
siderable relief  to  the  treasury  in  the  next  two  or  three 
years,  but  because  I  regard  it  as  the  commencement  of  a 
permanent  system  for  providing  a  national  currency  that 
would,  if  wisely  administered,  be  of  great  benefit  to  the 
people  and  a  reliable  support  to  the  government  in  the 
future. 

The  bill  passed  the  House  of  Representatives  on  February 
20th,  by  a  vote  of  78  ayes  to  64  nays,  and  became  a  law  on  Febru- 
ary 25,  1863,  with  the  approval  of  the  President. 


ROMANCE  AND  TRAGEDY  OF  BANKING  11 

This  Act,  however,  while  admirable  in  design,  was  very  crudely 
constructed,  and  contained  numerous  defects.  It  was,  as  Hugh 
McCulloch  stated  in  his  book  entitled  "Men  and  Measures  of  a 
Half  Century,"  very  unsymmetrical  in  arrangement  and  glar- 
ingly inconsistent  in  many  of  its  provisions.  It  was  full  of  am- 
biguities and  many  words  of  different  significance  were  used  as 
interchangeable  terms,  making  their  meaning  uncertain  and  diffi- 
cult of  interpretation. 

To  correct  these  numerous  defects  and  to  supply  omissions, 
which  the  practical  operation  of  the  law  soon  demonstrated  to  be 
essential,  it  became  necessary  within  fourteen  months  from  the 
date  of  its  passage  to  revise  the  entire  act  by  the  adoption  of  the 
Act  approved  June  3,  1864,  under  the  same  title. 

This  latter  act,  with  such  amendments  thereof  as  have  since 
been  enacted,  constituted  the  national  banking  laws.  The  title, 
however,  was  changed  by  the  Act  of  June  20,  1874,  which  pro- 
vides that  the  Act  entitled  "An  act  to  provide  a  national  cur- 
rency secured  by  a  pledge  of  United  States  bonds,  and  to  provide 
for  the  circulation  and  redemption  thereof,  approved  June  3, 
1864,  shall  hereafter  be  known  as  'The  National  Bank  Act.'  " 

The  Act  of  1863  authorized  the  issue  of  circulation  to  any 
State  bank  existing  at  the  time  of  its  passage,  which  was  the 
owner  and  holder  of  United  States  bonds,  to  the  amount  of  fifty 
per  centum  of  its  capital  stock,  under  the  same  conditions  as  cir- 
culation was  issued  to  national  banks,  except  that  the  amount  of 
such  issues  could  not  exceed  fifty  per  centum  of  the  capital  stock 
of  the  bank  or  the  market  value  of  the  bonds  deposited.  This 
privilege  was  not  conferred  upon  State  banks  by  the  Act  of  1864, 
and  no  circulation  ever  was  issued  to  State  banks  under  the  Act 
of  1863,  as  no  such  bank  ever  availed  itself  of  this  provision. 

Fifty-nine  years  have  gone  by  since  the  adoption  of  the  Na- 
tional Bank  Act,  and  12,230  banks  have  been  chartered  under 
its  provisions,  including  2292  State  banks  converted  into  na- 
tional associations^.  It  never  was  a  perfect  measure.  Perfec- 
tion was  not  claimed  for  it  at  the  time  of  its  enactment  by  any  of 
its  most  ardent  supporters.     It  was  born  during  a  period  of  in- 


^June  30,  1922. 


12  ROMANCE  AND  TRAGEDY  OF  BANKING 

ternal  strife,  and  necessity  was  its  parent.  That  it  did  not  develop 
perfection  and  improve  with  age  is  due  altogether  to  the  environ- 
ment of  its  birth  and  want  of  proper  legislative  nourishment  and 
attention  as  it  grew  to  maturity.  But  notwithstanding  its  many 
imperfections,  it  stood  the  test  of  time  and  furnished  to  the  nation 
the  best  banking  system  it  had  ever  known. 

The  National  Bank  Act  was  not  afflicted  with  any  incurable 
maladies,  as  some  theoretical  financiers  represented  it  to  be.  Its 
ailments  were  from  time  to  time  thoroughly  diagnosed  and  were 
well  understood.  Its  principal  weakness  was  due  to  a  sluggish 
circulation,  which  would  readily  have  responded  to  treatment  if 
the  proper  legislative  remedies  had  been  applied. 

The  principal  remedies  necessary  to  the  perfection  and  per- 
petuation of  the  system  were  (1)  the  injection  of  such  elasticity 
into  the  circulation  of  the  banks  as  would  have  enabled  it  at  all 
times  to  automatically  expand  and  contract  in  proportion  to  the 
legitimate  business  demands  made  upon  it;  (2)  the  adoption  of 
such  additional  safeguards  as  would  have  added  to  the  security 
of  depositors  and  other  creditors,  increased  confidence  in  the 
soundness  and  stability  of  the  banks,  and  minimized  liability  to 
failure,  and  (3)  such  an  enlargement  of  the  corporate  powers  of 
the  banks  as  would  have  enabled  them  to  transact  some  of  the 
business  which  had  become  necessarily  incidental  to  commercial 
banking  subsequent  to  the  enactment  of  the  original  act. 

The  Federal  Reserve  Act,  approved  December  23,  1913,  reme- 
died some  of  these  delinquencies  by  providing  a  circulating 
medium  sufficiently  elastic  to  readily  supply  the  periodical  de- 
mands for  additional  currency  for  crop  moving  purposes  and 
increased  industrial  or  conunercial  activity,  and  for  the  automatic 
retirement  of  this  currency  when  no  longer  required  for  legitimate 
business. 

It  provided  also  for  the  mobilization  of  bank  reserves  and 
their  availability  when  needed. 

These  and  other  provisions  of  the  Federal  Reserve  Act  have 
immensely  improved  and  strengthened  the  laws  relating  to  cur- 
rency issues,  and  otherwise  enlarged  the  scope  of  powers  of  the 
banks  along  the  lines  above  suggested. 


CHAPTER  II 

The  Currency  Bureau 

THE  National  Currency  Bureau,  or  the  Office  of  the  Comp- 
troller of  the  Currency,  as  it  is  generally  known,  was  estab- 
lished May  9,  1863,  by  the  appointment  and  qualification 
of  Hon.  Hugh  McCuUoch  as  Comptroller,  and  the  selection  bj^ 
him  of  a  working  force  consisting  of  three  clerks,  two  copyists 
and  one  messenger.  The  messenger  was  John  Joy  Edson,  who 
subsequently  became  one  of  Washington's  most  prominent  citi- 
zens and  business  men  and  was  President  of  two  of  its  principal 
and  most  successful  financial  institutions. 

No  bureau  of  the  several  executive  departments  of  the  Federal 
government  has  borne  a  closer  or  more  important  relation  to  the 
business  interests  of  the  country  at  large  than  the  National  Cur- 
rency Bureau,  and  no  bureau  officer  is  vested  by  law  with  greater 
responsibilities  or  more  independent  powers  of  action  than  the 
Comptroller  of  the  Currency. 

It  evidently  was  the  desire  and  intention  of  the  framers  of  the 
National  Bank  Act  to  make  the  office  of  the  Comptroller  a  non- 
political  office  and  to  remove  it  as  far  as  practicable  from  the 
influences  incident  to  the  quadrennial  changes  in  party  or  politi- 
cal administration  of  the  Federal  government.  To  this  end  the 
term  of  the  Comptroller  was  fixed  by  the  original  and  the  amend- 
atory acts  at  five  years,  and  he  was  required  to  report  annually 
direct  to  Congress,  instead  of  to  the  head  of  the  Treasury  De- 
partment, as  other  department  bureau  officers  are  required  to  do. 

The  purpose  of  this  latter  requirement  was  to  enable  the 
Comptroller  to  present  to  Congress  for  consideration  his  inde- 
pendent views  and  recommendations  in  regard  to  the  conditions 
and  necessities  of  the  banking  interests  and  currency  needs  of  the 
country,  free  from  censorship  by  his  official  superior,  the  head  of 
the  Treasury  Department. 

The  impression  seems  to  prevail  that  the  provision  in  the 
statute  fixing  the  tenure  of  office  of  the  Comptroller  of  the  Cur- 

13 


14  ROMANCE  AND  TRAGEDY  OF  BANKING 

rency  at  five  years  prevented  the  removal  of  this  official  during  his 
term,  except  by  impeachment.     Such,  however,  is  not  the  case. 

The  Act  of  February  25,  1863,  contained  a  provision  that  the 
Comptroller  "shall  hold  his  office  for  the  term  of  five  years,  unless 
sooner  removed  by  the  President  hy  and  with  the  advice  and  con- 
sent of  the  Senate." 

When  the  bill  to  amend  this  act  was  before  the  Senate  for 
consideration,  in  April,  1864,  it  was  proposed  to  amend  this  sec- 
tion by  striking  out  the  words  hy  and  with  the  advice  and  con- 
sent of  the  Senate  and  make  the  provision  read,  shall  hold  his  office 
for  the  term  of  five  years  unless  sooner  removed  by  the  President. 

A  study  of  the  debate  in  the  Senate  on  this  proposed  amend- 
ment may  prove  of  interest  as  showing  the  intent  of  the  legislators 
in  connection  with  this  provision  of  law  as  finally  adopted.  This 
debate  will  be  found  in  the  Congressional  Globe  of  April  26,  1864<, 
as  follows: 

Senator  Grimes :  I  should  like  to  inquire  why  the  com- 
mittee propose  to  make  this  change.  I  remember  that  this 
clause  was  put  in  the  bill  of  last  year  upon  great  considera- 
tion, in  order  to  prevent  this  officer  from  being  a  mere 
political  officer,  as  he  doubtless  will  be,  if  he  is  to  be  turned 
out  without  any  consultation  with  the  Senate.  I  should  like 
to  know  wliat  change  has  come  over  the  spirit  of  the  dream 
of  the  Finance  Committee  on  that  subject. 

Senator  Fessenden:  The  reason  why  that  clause  was 
stricken  out  by  the  Committee  on  Finance  was  simply  this : 

That  provision  is  in  the  original  bill  that  we  passed  last 
year.  It  was  put  into  the  original  bill  because  it  was  thought 
advisable  that  this  office  should  be  in  a  very  particular 
degree  independent  of  political  changes  and  political  con- 
siderations. There  seemed  to  be  a  necessity  for  a  degree  of 
permanency  and  a  degree  of  independence  in  this  officer  that 
did  not  apply  to  others,  and  it  was  agreed  to.  When 
it  came  up  this  year  in  the  same  shape  the  attention  of  the 
committee  was  called  to  it,  and  we  came  to  the  conclusion 
that  there  might  be  difficulties  in  such  a  case  even  in  carry- 
ing that  out. 

In  the  first  place,  it  is  establishing  a  new  rule.  It  is  ques- 
tionable whether  the   President   has   not  the   power   of   ap- 


ROMANCE  AND  TRAGEDY  OF  BANKING  15 

pointing  this  oflScer  and  removing  him,  even  if  this  provision 
should  remain  in  the  bill.  It  has  been  held  in  all  other 
cases  that  the  power  of  removal  was  a  necessary  consequence 
of  the  power  of  appointment;  that  when  the  President  ap- 
pointed an  officer  who  was  provided  for  by  law  that  was 
all  very  well;  but  he  might  at  any  time  appoint  another  in 
his  place,  as  the  power  of  appointment  was  vested  in  him, 
and  that  power  of  appointment  necessarily  involved  the 
power  to  remove  the  incumbent  when  the  President  ap- 
pointed a  new  officer. 

On  the  contrary,  it  is  said  with  regard  to  an  office  cre- 
ated by  Congress,  Congress  has  the  right  to  fix  such  limita- 
tions upon  it  with  reference  to  the  power  of  removal 
as  it  sees  fit.  That  is  a  doctrine  that  has  never  been  acceded 
to  herefore.  At  any  rate,  this  made  an  exception  to  all 
rules,  even  with  regard  to  military  officers.  The  President 
has  always  exercised  the  power  to  strike  any  man  from  the 
list  of  officers  in  the  army  if  he  saw  fit  to  do  so,  as  we  have 
with  a  view  rather  to  acknowledge  that  power  and  to  induce 
its  exercise  in  the  present  condition  of  the  country,  made  a 
special  provision  of  law,  I  believe,  on  that  subject. 

The  difficulty  in  this  case  is  this:  If  you  provide  that 
the  Comptroller  of  the  Currency  shall  only  be  removed  by 
and  with  the  advice  and  consent  of  the  Senate,  it  may 
happen  that  in  the  recess  of  Congress  this  officer  may  be 
unfaithful.  He  will  wield  an  immense  power  in  the  country 
over  all  these  banks  with  this  accumulated  capital,  and  he 
could  in  the  course  of  a  very  short  time,  if  he  were  disposed 
to  do  so,  produce  the  most  disastrous  effects  upon  the  cur- 
rency of  the  country  by  his  own  motion.  It  will  be  difficult 
to  say  that  the  President  should  not  have  the  power  to 
remove  him  if  he  was  found  to  be  exercising  the  power  of 
his  office  in  that  way.  There  is  that  danger  always,  and 
that,  perhaps,  was  the  great  argument  that  made  the  con- 
struction of  this  power  what  it  is;  that  necessarily,  as 
Congress  is  not  always  in  session,  the  President  must  have 
the  power  of  removal  in  order  to  guard  against  evils  that 
might  follow  from  unfaithful  officers  who  would  otherwise 
hold  their  positions  contrary  to  the  interests  of  the  govern- 
ment. It  is  desirable  at  all  times,  if  this  provision  is  re- 
tained, that  the  President  shall  have  the  power  to   susp>end 


16  ROIVLA-NCE  AND  TRAGEDY  OF  BANKING 

for  a  time  for  sufficient  cause  the  powers  of  the  Comp- 
troller of  the  Currency  until  the  meeting  of  Congress,  and 
then  report  to  Congress  the  reasons  why  he  has  thus  sus- 
pended him. 

This  matter,  however,  came  up  this  morning  in  the  Com- 
mittee on  Finance,  and  it  was  thought  advisable  on  the 
whole  to  leave  the  amendment  stand,  as  we  originally  re- 
ported it,  striking  out  this  clause,  presuming  that  the  House 
of  Representatives  would  insist  (as  it  usually  does)  upon 
its  own  views  in  relation  to  this  important  amendment  of 
the  bill,  and  it  would  result  in  a  committee  of  conference, 
when  something  could  be  arranged  between  the  two  commit- 
tees that  would  be  effective  in  relation  to  it. 

For  myself,  while  I  see  the  force  of  the  argument  that 
this  office  ought  to  be  in  a  great  degree  independent,  I  also 
see  the  force  of  the  argument  that  the  power  of  suspending 
him  should  exist  in  the  President,  because  otherwise  during  a 
recess  of  Congress  the  great  interests  of  the  community 
might  be  left  to  the  mercy  of  the  Comptroller  of  the  Cur- 
rency, if  he  should  happen  to  be  an  unfaithful  man.  We 
thought  the  clause,  as  it  stood,  might  be  unsafe  in  that 
particular  at  some  future  time,  and  on  the  whole,  we  con- 
cluded to  strike  out  the  clause,  thinking  that  it  would  result 
in  an  arrangement  with  reference  to  it  that  might  obviate 
the  difficulties  on  both  sides. 

Senator  Buckalew:  I  desire  to  move  an  amendment  to  the 
amendment  of  the  committee.  I  move  to  insert  the  follow- 
ing words  in  place  of  those  proposed  to  be  stricken  out:  "up- 
on reasons  to  be  reported  by  him  to  the  Senate,"  so  that 
the  clause  will  read:  "And  shall  hold  his  office  for  the  term 
of  five  years,  unless  sooner  removed  by  the  President,  upon 
reasons  to  be  reported  by  him  to  the  Senate." 

Senator  Fessenden:  I  think  that  would  hardly  meet  the 
difficulty,  because  it  makes  his  reasons  conclusive  whether 
the  Senate  likes  them  or  not.  It  leaves  the  power  of  re- 
moval just  exactly  where  it  should  be,  if  this  clause 
should  be  stricken  out  altogether,  only  the  Presi- 
dent is  compelled  to  report  his  reasons  to  the  Senate. 
If  the  reasons  are  satisfactory  to  himself  they  are  to  operate. 
They  might  not  be  satisfactory  to  the  Senate,  but  still  that 
would  produce  no  effect  upon  the  act  itself.     I  think,  there- 


ROMANCE  AND  TRAGEDY  OF  BANKING      17 

fore,  that  the  amendment  to  the  amendment  would  not  cure 
the   evil. 

Senator  Pomeroy:  The  effect  of  it  would  be  that  if  the 
Senate  did  not  approve  of  the  reasons  given  by  the  President 
they  could  refuse  to  confirm  the  successor  appointed  to  the 
previous  Comptroller. 

Senator  Fessenden:  That  would  only  make  confusion. 
It  is  necessary  that  the  office  should  be  filled. 

Senator  Howard:  I  hope  the  Senate  will  concur  in  the 
amendment  of  the  committee  conditionally,  for  I  regard  it 
as  a  well  settled  law  that  under  the  Constitution  of  the 
United  States  the  President  has  the  absolute  power  of 
appointment  and  the  equally  absolute  power  of  removal. 
I  am  not  able  to  see  what  authority  we  have  to  annex  any 
conditions  or  limitations  to  the  President's  power  of  removal 
from  office.  If  he  has  the  power  of  appointment,  and  if  the 
power  of  removal  is  an  incident  to  the  power  of  appoint- 
ment, then  we  have  nothing  to  do  with  it,  and  we  can  only 
leave  the  responsibility  to  the  President  himself.  Suppose 
we  should  adopt  the  amendment  suggested  by  the  Senator 
from  Pennsylvania,  and  the  President  should  see  fit  to 
remove  this  officer  without  giving  to  Congress  any  reasons 
whatever,  what  would  be  the  result  in  law?  Would  he,  or 
would  he  not  be  actually  removed?  Would  he  remain  in 
office  because  the  Persident  had  not  given  reasons  for  his 
removal,  or  what  would  be  his  condition  ?  I  should  really 
like  to  understand  from  the  honorable  Senator  from 
Pennsylvania  what  would  be  the  logical  consequences.  I 
think  that  the  reasons  given  by  the  honorable  Chairman 
of  the  Committee  on  Finance  for  the  amendment  which 
that  Committee  has  suggested,  are  perfectly  satisfactory 
and  perfectly  conclusive.  Let  us  leave  to  the  President  his 
full  responsibility  for  exercising  the  laws  and  hold  him  to 
that  responsibility  before  the  people. 

The  bill  passed  the  Senate  and  was  referred  to  a  conference 
committee  of  the  two  Houses,  and  finally  became  a  law  with  the 
provision  in  regard  to  the  tenure  of  office  of  the  Comptroller, 
reading  as  follows : 


18      ROMANCE  AND  TRAGEDY  OF  BANKING 

Shall  hold  his  office  for  the  term  of  five  years,  unless 
sooner  removed  by  the  President,  upon  reasons  to  he  com- 
municated  by    him    to   the    Senate. 

This  provision  of  law  has  remained  the  same  to  the  present 
time,  and  although  the  Comptroller  is  appointed  for  a  term  of 
five  years,  he  virtually  holds  his  office  at  the  pleasure  of  the  Presi- 
dent, and  may  be  removed  at  any  time,  for  reasons  which  the 
President  may  deem  sufficient. 


Composition  of  the  Currency  Bureau 

The  Currency  Bureau  is  composed  of  seven  divisions,  each  of 
which  has  a  chief  and  a  corps  of  clerks  with  distinct  and  well 
defined  duties.  The  regular  working  force  of  the  office,  Janu- 
ary 1,  1922,  including  chiefs  of  divisions,  numbered  two  hundred 
and  twenty-seven. 

In  addition  to  this  office  force,  on  January  1,  1922,  there  were 
employed  in  the  field,  one  hundred  and  ninety-seven  national  bank 
examiners  and  two  hundred  and  ninety  assistant  examiners  en- 
gaged in  the  examination  of  banks,  who  make  full  and  detailed 
reports  to  the  Comptroller  of  the  condition  of  the  banks  exam- 
ined, on  specially  prepared  blanks.  There  were  also  employed 
in  the  Chief  Examiners'  offices,  one  hundred  and  ten  clerks  en- 
gaged in  clerical  work  in  connection  with  the  examination  of  the 
banks. 

The  Federal  Reserve  Act  requires  each  bank  to  be  examined 
not  less  than  twice  in  each  calendar  year,  but  many  banks  are 
examined  more  frequently  according  to  the  condition  shown  by 
the  previous  report.  Examiners'  reports  are  treated  as  confi- 
dential communications,  are  carefully  guarded,  and  copies  are 
never  furnished  except  to  the  bank  itself  and  to  the  Federal  Re- 
serve Bank  of  the  district  in  which  the  bank  is  located. 

In  addition  to  the  reports  of  examination  received  from  each 
bank  examiner,  every  bank  is  required  by  law  to  make  five  reports 
of  condition  each  year,  for  a  past  date  fixed  by  the  Comptroller, 
without  previous  notice,  sworn  to  by  the  cashier  of  the  bank,  or 


ROMANCE  AND  TRAGEDY  OF  BANKING  19 

the  president,  and  attested  by  at  least  three  directors,  on  forms 
prescribed  and  furnished  by  the  Comptroller. 

These  reports  are  carefully  examined  by  the  clerks  of  the 
office,  and  systematically  tabulated,  first  by  States,  and  reserve 
cities,  and  finally  totaled  for  the  United  States.  These  abstracts 
contain  a  vast  amount  of  valuable  statistical  information  of  great 
interest  to  bankers,  statisticians  and  writers  on  financial  subjects 
generally,  both  in  this  and  other  countries.  The  bureau  is  well 
organized,  the  personnel  is  efficient,  and  the  systematic  manner  in 
which  the  work  is  handled,  with  the  use  of  labor-saving  devices, 
enables  the  force  to  dispose  of  the  vast  and  constantly  increasing 
volume  of  business  with  promptness  and  despatch,  so  that  the 
current  work  of  the  bureau  may  be  said  to  be  always  up  to  date. 

National  Bank  Circulation  First  Printed  Under  Contract 

The  Bureau  of  Engraving  and  Printing,  in  which  all  national 
bank  notes  and  other  securities  of  the  Government  are  now 
printed,  was  organized  in  1862,  under  authority  of  an  Act  of 
Congress,  approved  July  11,  1862,  entitled  "An  Act  to  authorize 
an  additional  issue  of  United  States  notes,  and  for  other 
purposes." 

This  Act  authorized  the  Secretary  of  the  Treasury,  if  he 
deemed  it  expedient  to  have  the  United  States  notes  engraved  and 
printed  by  contract,  to  cause  them,  or  any  part  of  them,  to  be 
engraved,  printed  and  executed  in  such  form  as  he  should  pre- 
scribe at  the  Treasury  Department  in  Washington  under  his 
direction,  and  to  purchase  and  provide  all  the  machinery  and 
materials  and  to  employ  such  persons  and  appoint  such  officers 
as  may  be  necessary  for  that  purpose. 

The  printing  of  national  bank  currency  was  commenced  in 
1863.  The  first  notes  were  printed  in  that  year.  At  that  time 
all  Government  securities  were  printed  in  New  York  City  by  the 
Continental,  American  and  National  Bank  Note  Companies.  The 
notes  printed  by  these  companies  were  delivered  to  the  Treasury 
Department  in  an  unfinished  condition.  After  being  entered  on 
the  books  in  the  office  of  the  Comptroller  of  the  Currency  they 
were  sent  to  the  Bureau  of  Engraving  and  Printing,  where  the 


20  ROMANCE  AND  TRAGEDY  OF  BANKING 

seal  of  the  Treasury  Department  was  placed  on  each  note.  The 
Bureau  of  Engraving  and  Printing  was  at  that  time  located  on 
the  upper  floor  of  the  Treasury  Building. 

The  Act  of  June  20,  1874,  required  that  all  notes  printed 
after  the  approval  of  that  act  should  bear  the  charter  number 
of  the  bank  issuing  the  notes.  All  notes  on  hand  in  the  Comp- 
troller's vault  at  that  time  were  sent  to  the  Bureau  to  have  the 
charter  number  of  the  banks  placed  thereon  before  issues  were 
made. 

The  Bureau  of  Engraving  and  Printing  was  removed  to  the 
building  adjoining  the  one  it  now  occupies  in  1875.  All  engraving 
and  printing  connected  with  Government  securities  was  then 
transferred  to  that  bureau  from  New  York  City  and  since  that 
time  has  been  executed  under  the  direction  of  the  Secretary  of 
the  Treasury,  commencing  at  the  beginning  of  the  fiscal  year 
July  1,  1875. 

A  new  series  of  national  bank  notes  was  then  adopted,  known 
as  the  Series  of  1875.  The  seal  upon  these  notes  was  changed 
from  the  original  saw-tooth  seal  to  the  round  seal  with  scalloped 
edges,  and  the  legend  "Series  of  1875"  was  printed  across  their 
face  in  red  ink.  This  series  of  notes  continued  to  be  issued  until 
the  passage  of  the  Act  of  July  12,  1882,  providing  for  the  exten- 
sion of  charters  of  national  banks,  when  the  Series  of  1882  was 
adopted,  and  this  series  was  issued  to  all  new  banks  organized 
after  that  date  as  well  as  to  the  banks  extending  their  charters. 

The  Act  of  April  12,  1902,  provided  for  a  further  extension 
of  the  corporate  existence  of  the  banks,  when  the  present  series 
of  notes,  known  as  the  Series  of  1902,  was  adopted  and  were 
issued  to  all  banks  re-extending  their  charters  as  well  as  to  all 
new  banks  organized  since  that  date. 

When  the  Series  of  1882  notes  was  adopted  the  only  entirely 
new  design  was  that  of  the  notes  of  the  five  dollar  denomination, 
containing  the  vignette  of  President  Garfield.  The  other  notes, 
of  the  denominations  of  ten,  twenty,  fifty  and  one  hundred  dol- 
lars, were  made  from  the  original  plates  of  the  old  series,  amended 
by  inserting  on  the  margin  of  the  note  the  charter  number  of  the 
bank  in  six  places  and  changing  the  seal  of  the  Treasury  Depart- 


ROMANCE  AND  TRAGEDY  OF  BANKING  21 

ment  from  the  small  scalloped  seal  to  the  larger  one  of  practi- 
cally the  same  design. 

As  the  notes  authorized  by  the  original  act,  of  a  higher  de- 
nomination than  one  hundred  dollars,  had  been  practically  dis- 
carded by  the  banks,  on  account  of  the  cost  of  maintenance,  notes 
of  these  denominations  have  not  been  printed  since  1882. 

The  Act  of  May  30,  1908,  authorized  the  issue  of  notes  of 
the  denomination  of  ten  thousand  dollars,  but  none  of  this  amount 
ever  has  been  ordered  by  the  banks  and  no  designs  for  this  denomi- 
nation ever  have  been  prepared. 

Previous  to  the  passage  of  the  Act  of  June  20,  1874,  national 
banknote  plates  were  engraved  and  the  circulation  printed  there- 
from at  the  expense  of  the  Government,  but  a  provision  in  that 
Act  required  each  association  thereafter  organized  to  reimburse 
the  Treasury  Department  the  cost  of  engraving  the  plates,  since 
which  time  the  banks  have  paid  for  their  plates. 

The  National  Currency  Bureau  has  been  the  source  of  consid- 
erable revenue  to  the  Government  since  its  establishment,  and  has 
been  more  than  self-sustaining.  The  receipts  from  tax  on  circu- 
lation and  other  sources  from  1863  to  June  30,  1921,  amounted 
to  over  $155,188,318.23.  The  operating  expenses  of  the  bureau 
during  the  same  period  amounted  to  over  $20,965,820,  leaving  a 
net  balance  or  profit  to  the  Government  of  over  $134,222,498,  or 
an  annual  average  profit  of  over  $231,418,  during  the  fifty-eight 
years  of  the  bureau's  existence. 

First  Bank  Organized 

It  is  generally  conceded,  and  the  fact  is  borne  out  by  the 
records  of  the  Comptroller's  office,  that  the  first  bank  to  open  for 
business  under  a  national  bank  charter  was  the  First  National 
Bank  of  Davenport,  Iowa. 

The  charter  number  of  this  bank  was  fifteen.  The  earliest 
paper  on  file  in  the  Comptroller's  office  pertaining  to  this  bank 
bears  date  of  May  29,  1863.  The  bank  was  chartered  on  June  24, 
1863,  and  opened  for  business  June  29,  1863. 

In  the  history  of  this  bank,  prepared  by  Hon.  A.  F.  Dawson, 
a  former  member  of  Congress,  and  later  president  of  the  bank. 


22  ROMANCE  AND  TRAGEDY  OF  BANKING 

it  is  stated  that  application  for  a  national  charter  was  made  on 
February  24,  1863,  and  was  received  at  the  Treasury  Depart- 
ment on  February  26,  1863. 

The  first  bank  to  receive  a  certificate  of  authority  to  begin 
business  as  a  national  association  was  the  First  National  of 
Philadelphia,  Pa.  This  bank  was  given  Charter  No.  1,  dated 
June  20,  1863,  but  it  did  not  open  for  business  until  July  11, 
1863. 


HUGH  McCULLOCH 
First  Comptroller  of  the  Currency,  1863-1865 


CHAPTER  III 

Hugh  McCulloch 

HUGH  McCULLOCH  was  appointed  Comptroller  of  the 
Currency,  March  9,  1863,  and  held  the  office  until 
March  8,  1865.  He  was  born  at  Kennebunk,  Maine, 
December  7,  1808.  In  1824  he  entered  Bowdoin  College,  but  on 
account  of  ill  health  he  was  obliged  to  leave  the  institution  in 
1826.  He  subsequently  engaged  in  teaching  school,  and  later 
studied  law. 

In  McCulloch's  "Men  and  Measures  of  a  Half  Century,"  he 
gives  a  very  interesting  account  of  how  he  was  selected  to  be  the 
first  Comptroller  of  the  Currency  and  the  circumstances  under 
which  he  accepted  the  appointment.  He  states  that  in  1862  he 
went  to  Washington  for  the  purpose  of  opposing  the  establish- 
ment of  the  national  banking  system,  upon  the  ground  that  it 
might  prove  greatly  prejudicial  to  the  State  banks.  He  was  at 
that  time  president  of  the  State  Bank  of  Indiana,  one  of  the  larg- 
est banking  institutions  in  the  countr}^  the  main  office  of  which 
was  located  at  Indianapolis.  His  connection  with  this  bank  began 
in  October,  1835,  when  he  was  appointed  cashier  and  manager  of 
the  Fort  Wayne  branch  of  this  institution.  He  was  a  lawyer  by 
profession  and  previous  to  his  acceptance  of  the  cashiership  of 
this  bank  had  had  no  banking  experience.  When  the  Bank  of  the 
State  of  Indiana  was  organized  in  1857,  to  succeed  the  State 
Bank  of  Indiana,  he  w^as  chosen  as  its  first  president  and  con- 
tinued his  connection  with  this  institution  in  that  capacity  until 
he  resigned  in  April,  1863,  to  accept  appointment  as  Comptroller 
of  the  Currency. 

Although  Mr.  McCulloch  was  originally  opposed  to  the 
national  banking  system  his  opinion  underwent  a  complete  change 
after  the  bank  act  became  a  law,  and,  because  of  this  fact,  he 
stated,  the  tender  of  the  position  of  Comptroller  of  the  Currency 
to  him  by  Secretary  Chase  was  not  only  wholly  unexpected,  but 
was  exceedingly  embarrassing. 

23 


24      ROMANCE  AND  TRAGEDY  OF  BANKING 

In  a  letter  written  to  a  friend,  published  in  The  Bankers 
Magazine,  he  said: 

The  national  system  of  banking  has  been  devised  with 
a  wisdom  that  reflects  the  highest  credit  upon  its  author, 
to  furnish  the  people  of  the  United  States  a  national  bank 
note  circulation  without  the  agency  of  a  national  bank. 
It  is  not  to  be  a  mammoth  corporation  with  power  to  in- 
crease and  diminish  its  discounts  and  circulation,  at  the  will 
of  its  managers,  thus  enabling  a  board  of  directors  to  con- 
trol the  business  and  politics  of  the  country.  It  can  have 
no  concentrated  political  power.  Nor  do  I  see  how  it  can 
be  diverted  from  its  proper  and  legitimate  objects  for 
partisan  purposes.  It  will  concentrate  in  the  hands  of  no 
privileged  persons  a  monopoly  of  banking.  It  simply 
authorizes,  under  suitable  and  necessary  restrictions  a  num- 
ber of  persons,  not  less  than  five,  in  any  of  the  states  or 
territories  of  the  Union,  to  engage  in  the  business  of  bank- 
ing, while  it  prevents  them  from  issuing  a  single  dollar  to 
circulate  as  money  which  is  not  secured  by  the  stocks  and 
resources  of  the  government.  It  is,  therefore,  in  my  judg- 
ment, (as  far  as  calculation  is  regarded,)  not  only  a  per- 
fectly safe  system  of  banking,  but  it  is  one  that  is  eminently 
adapted  to  the  nature  of  our  political  institutions. 

In  referring  to  his  conference  with  Secretary  Chase,  at  the 
time  he  was  tendered  and  accepted  the  appointment  of  Comp- 
troller, McCulloch  states  that  when  the  interview  was  about  to 
terminate  he  said  to  the  Secretary  that  he  had  but  one  request  to 
make,  and  that  was  that  as  he  would  be  responsible  for  the  proper 
organization  and  management  of  the  bureau,  which  was  likely  to 
become  a  very  important  one,  he  desired  to  have  the  selection  of 
his  clerks.  To  this  request,  he  quotes  Secretary  Chase  as  saying : 
"Manage  the  bureau  in  your  own  way.  When  you  need  clerks, 
and  as  you  need  them,  send  their  names  to  me  and  they  will  be 
appointed."  This  understanding,  McCulloch  said,  was  fully  car- 
ried out,  and  that  in  no  instance  while  he  was  Comptroller  was 
an  appointment  made  for  the  bureau  which  was  not  on  his 
recommendation. 


ROMANCE  AND  TRAGEDY  OF  BANKING  2& 

While  this  rule  has  been  adhered  to  generally  since  Mr.  Mc- 
Culloch's  time,  there  have  been  some  notable  exceptions  and  irri- 
tating consequences  resulting  from  interferences  by  subordinate 
officials  of  the  Secretary's  office  with  the  personnel  and  manage- 
ment of  the  bureau,  more  or  less  frequent  and  successful  accord- 
ing to  the  flexibility  or  rigidity  of  the  vertebrae  of  the  occupant 
of  the  Comptroller's  chair,  for  the  time  being,  and  the  degree  of 
his  insistence,  not  only  upon  an  observance  of  the  rule  established 
by  McCulloch,  but  of  the  provision  of  the  national  banking  laws 
which  conferred  upon  the  Comptroller  the  authority  to  "employ 
from  time  to  time  the  necessary  clerks,  to  be  appointed  and  classi- 
fied by  the  Secretary  of  the  Treasury,  to  discharge  such  duties 
as  the  Comptroller  shall  direct."  This  right  and  privilege  was 
recognized  by  every  Secretary  of  the  Treasury  since  the  Cur- 
rency Bureau  was  established  whenever  the  Comptroller  insisted 
upon  the  exercise  of  his  prerogative  by  appealing  to  him  against 
the  arbitrary  interference  of  some  subordinate  official  of  his  office. 

While  some  very  able  and  experienced  men  have  occupied  the 
position  of  Assistant  Secretary  of  the  Treasury,  there  was  a  time 
for  awhile  when  these  positions  became  an  exceedingly  attractive 
school  of  finance  from  which  a  number  of  very  bright  and  excep- 
tionally capable  young  men,  with  no  previous  experience  in  bank- 
ing or  finance,  were  graduated  in  remarkably  short  periods  as 
expert  financiers  and  bankers,  with  the  honorary  degree  of  "Ex'* 
as  indicating  their  principal  specialty  and  main  reliance  for  rec- 
ognition in  the  busy  financial  and  commercial  world. 

When  these  young  men  first  entered  the  service  of  the  Depart- 
ment, they  became  thoroughly  imbued  with  the  idea  that  every- 
thing in  connection  with  the  Department's  business  methods 
needed  reforming,  and  they  immediately  set  to  work  to  suggest  or 
inaugurate  changes  of  various  kinds  which,  while  invariably  in- 
volving the  Government  in  considerable  unnecessary  expense  and 
generally  disturbing  the  public  business,  contributed  nothing 
toward  improvement  in  methods  or  economy  in  public  expendi- 
tures, but  in  some  instances  amounted  to  pure  vandalism  in  the 
destruction  of  public  property,  wastefulness  of  public  funds,  and 
demoralization  of  the  service  generally. 


26  ROMANCE  AND  TRAGEDY  OF  BANKING 

McCulloch's  Annual  Reports 

During  the  twenty-two  months  of  McCulloch's  incumbency  of 
the  office  of  Comptroller  of  the  Currency,  he  made  two  annual 
reports  to  Congress.  The  first  report  was  devoted  almost  entirely 
to  a  review  in  detail  of  the  National  Bank  Act  passed  in  1863. 
He  pointed  out  its  numerous  defects,  recommended  the  repeal  of 
a  number  of  its  provisions,  the  amendment  of  others,  and  the  en- 
actment of  additional  legislation  to  supply  omissions  which  the 
practical  operation  and  administration  of  the  law  had  shown  to 
be  necessary.  These  suggestions  were  largely  adopted  in  the  1864< 
revision  of  the  act. 

The  second  report  of  Mr.  McCulloch  was  devoted  principally 
to  a  discussion  of  the  paper  issues  of  the  Government,  and  the 
note-issuing  function  of  the  national  banks. 

While  defending  the  course  of  the  Government  in  resorting  to 
the  issue  of  United  States  notes,  endowed  with  lawful  money  quali- 
ties, as  a  great  public  necessity  at  that  time,  he  expressed  the  view 
that  when  the  Civil  War  ended  and  the  necessities  which  led  to  the 
issue  of  this  form  of  money  had  ceased  to  exist,  these  notes  should 
be  promptly  retired. 

His  objections  to  such  Government  issues  were  stated  with 
great  clearness  and  force.  Paper  money,  he  said,  had  been  found 
to  be  useful  and  an  absolute  necessity  in  all  commercial  countries 
in  the  transaction  of  business,  and  as  a  substitute  for  coin,  but 
that  all  such  money  should  be  convertible  into  coin.  Its  issue 
should  be  regulated  by,  and  should  not  exceed  in  volume  the  legiti- 
mate demands  of  healthy  trade. 

While  admitting  the  imperfections  of  the  circulation  furnished 
by  the  national  banks,  he  contended  that  all  of  the  objections  that 
were  raised  to  banknote  circulation  applied  with  equal,  if  not 
greater,  force  to  Government  note  issues,  as  the  volume  of  the 
former  is  restricted  by  law,  and  is  liable  for  redemption,  while 
the  latter  is  regulated  only  by  the  necessities  of  the  Government 
or  the  interests  of  the  political  party  in  power,  having  no  relation 
to  the  needs  of  trade  and  commerce. 

He  contended  that  no  kind  of  paper  money  is  without  its 
objections.     While  its  use  may  be  and  is  a  commercial  necessity. 


ROMANCE  AND  TRAGEDY  OF  BANKING  27 

no  form  of  paper  currency  that  has  yet  been  contrived  is  as  unob- 
jectionable as  national  bank  circulation. 

Mr.  McCulloch  expressed  his  regret  that  so  many  national 
banks  were  being  organized  in  states  in  which  before  the  passage 
of  the  National  Bank  Act  there  was  no  deficiency  in  banking 
facilities. 

The  purpose  of  the  National  Bank  Act,  he  said,  was  not  to 
destroy  State  banks,  but  to  absorb  them,  and  he  expressed  the 
hope  that  other  states  would  follow  the  example  of  Massachu- 
setts, Connecticut  and  Pennsylvania  and  adopt  laws  granting 
authority  to  State  banks  to  convert  into  national  associations, 
without  any  disturbance  or  discontinuance  of  their  business. 

It  appears  from  this  that  Mr.  McCulloch,  like  many  others  at 
that  time,  was  under  the  impression  that  although  the  National 
Bank  Act  authorized  the  conversion  of  State  banks  issuing  circu- 
lation into  national  associations,  without  the  formality  of  liqui- 
dation and  reoi-ganization,  the  authority  of  the  state  was  also 
necessary.  While  in  many  instances  this  contention  was  not 
maintained  by  state  authorities  and  no  objection  was  interposed 
to  such  conversions,  the  question  does  not  seem  to  have  been  judi- 
cially determined  until  1876,  when,  in  the  case  of  Casey  v.  Galli, 
94  U.  S.,  673,  the  Supreme  Court  of  the  United  States  held  that 
"No  authority  other  than  that  conferred  by  Act  of  Congress  is 
necessary  to  enable  a  State  bank  to  become  a  national  banking 
association." 

In  April,  1867,  an  act  was  passed  by  the  Legislature  of  the 
State  of  New  York  authorizing  any  national  bank  in  the  state 
to  become  a  state  banking  institution  by  conversion  and  by  virtue 
of  such  conversion  be  absolved  from  all  allegiance  to  the  Federal 
authorities  and  responsibility  as  a  national  bank. 

The  question  of  the  power  of  a  national  bank  to  convert  into 
a  state  institution  under  authority  of  this  act  was  referred  to  the 
Attorney  General  of  the  United  States,  who,  in  an  opinion  ren- 
dered May  19,  1869,  held  that  it  is  not  within  the  power  of  the 
Legislature  of  a  state  to  alter,  modify,  add  to,  or  diminish  the 
powers,  duties  or  liabilities  created  or  conferred  upon  a  banking 
association  established  under  an  Act  of  Congress.  National 
banks,  he  said,  are  distinct  bodies  corporate,  deriving  their  exist- 


28  ROMANCE  AND  TRAGEDY  OF  BANKING 

ence  from  the  United  States,  and  they  cannot  be  merged  or  in 
any  manner  identified  with  a  state  institution  without  authority 
of  Congress,  except  by  liquidating  and  winding  up  their  affairs 
and  incorporating  anew  under  the  state  laws. 

A  State  bank  may  under  authority  of  a  provision  in  the  Na- 
tional Bank  Act  convert  into  a  national  association,  but  a 
national  association  cannot  convert  into  a  State  bank. 

Mr.  McCulloch  recommended  an  enactment  fixing  a  uniform 
rate  of  interest  for  national  banks,  and  a  tax  on  State  bank  cir- 
culation, at  such  a  rate  as  would  make  it  unprofitable  for  such 
banks  to  issue  circulation,  and  thereby  contribute  toward  making 
national  bank  circulation  what  the  bank  act  intended  it  should 
be — a  uniform  currency  for  the  whole  country. 

In  concluding  his  report  for  1864,  Mr.  McCulloch  suggested 
the  removal  of  the  Currency  Bureau  from  Washington  to  Phila- 
delphia or  New  York.  He  stated  that  it  was  of  the  greatest  im- 
portance that  the  national  currency  system  should  be  independent 
of  politics  and  freed  from  political  influences.  He  expressed  the 
opinion  that  the  bureau  should  be  an  independent  department  of 
the  Government,  and  he  believed  that  this  could  best  be  accom- 
plished by  separating  it  entirely  from  the  Treasury  Department, 
and  locating  it  in  one  of  the  principal  financial  centers  of  the 
country. 

It  is  exceedingly  doubtful,  however,  in  the  light  of  later  events, 
whether  the  bureau  would  have  been  as  free  from  political  and 
financial  influences,  or  at  least  from  the  suspicion  of  such  influ- 
ences, if  this  suggestion  of  Mr.  McCulloch  had  been  adopted,  as 
it  has  been  by  remaining  a  bureau  of  the  Treasury  Department, 
located  in  Washington,  and  operating  in  harmony  with  that  de- 
partment, especially  if  the  point  of  location  had  been  New  York 
City,  with  the  environment  of  Wall  Street. 

The  only  conceivable  advantage  to  be  derived  from  a  change 
of  location  of  the  Currency  Bureau  from  Washington  to  New 
York  was  the  increased  facilities  that  might  be  afforded  for  the 
redemption  of  circulation.  As  about  fifty  per  cent,  of  the  national 
bank  notes  sent  to  Washington  for  redemption  come  from  New 
York  City,  the  expense  and  delay  of  transportation  back  and 
forth  would  be  avoided.     But  at  the  time  Mr.  McCulloch  made 


ROMANCE  AND  TRAGEDY  OF  BANKING  29 

this  suggestion  a  change  of  location  of  the  bureau  did  not  have 
■even  this  consideration  to  commend  it,  as  New  York  City  was 
then  a  redemption  city. 

McCulloch's  Circular  Letter  to  the  Banks 

One  of  the  most  notable  documents  ever  issued  from  the  Comp- 
troller's office  was  a  circular  letter  addressed  by  McCulloch,  in 
1864,  to  the  managers  of  national  banks.  This  circular  contains 
so  many  excellent  suggestions  and  is  so  replete  with  wholesome 
advice  in  regard  to  sound  banking  methods  and  management  that 
it  can  be  very  profitably  read  and  closely  followed  by  many 
bankers  of  the  present  day,  as  a  safe  guide  in  the  conduct  of  their 
banking  business. 

The  following  are  some  of  the  salient  features  of  this  circular : 

The  business  of  a  bank  should  be  carefully  and  promptly 
conducted.  The  books  at  the  close  of  each  day  should  exhibit 
the  amount  of  cash  on  hand,  and  the  exact  condition  of  the 
bank.  In  large  banks  all  the  books  should  be  balanced 
daily.  In  small  banks,  weekly,  or  oftener;  and  as  often  as 
every  quarter  a  careful  examination  of  its  affairs  should 
be  made  by  committees  of  the  directors  appointed  for  this 
purpose,  and  a  report  of  the  result  of  these  examinations 
entered  upon   the  minutes. 

The  officers  of  the  bank,  other  than  the  president,  should 
be  appointed  to  hold  their  office  during  the  pleasure  of  the 
board,  and  bonds  should  be  executed  accordingly.  This  will 
obviate  the  necessity  of  requiring  annual  bonds  from  these 
officers,  and  will  prevent  the  occurrence  of  a  time  when  they 
will  not  be  imdcr  bond.  Presidents  being  annually  elected 
or  appointed  will,  of  course,  be  required  to  give  annual 
bonds,  and  whenever  an  official  is  reappointed  a  bond  should 
be   required   of  him. 

No  loans  should  be  made  that  are  not  secured  beyond  a 
reasonable  contingency.  Nothing  should  be  done  to  foster 
and  encourage  speculation.  Facilities  should  be  given  only  to 
legitimate  and  prudent  transactions.  Discounts  should  be 
made  on  as  short  time  as  the  business  of  the  customer  will 
permit,    and    payment   of   all   paper    at   maturity    should    be 


30  ROMANCE  AND  TRAGEDY  OF  BANKING 

insisted  upon,  no  matter  whether  the  bank  needs  the  money 
or  not.  A  note  or  a  bill  should  never  be  renewed  merely 
because  the  bank  may  not  know  where  to  place  the  money 
with  equal  advantage  if  the  paper  is  paid.  In  no  other  way 
can  the  bank  properly  control  the  discount  line,  or  make  it 
at  all  times  reliable. 

Distribute  the  loans  rather  than  concentrate  them  in  a 
few  hands.  Large  loans  to  a  single  individual  or  firm, 
although  sometimes  proper  and  necessary,  are  generally  in- 
judicious and  frequently  unsafe.  Large  borrowers  are  apt 
to  control  the  bank,  and  when  this  is  the  relation  Ixitween 
a  bank  and  its  customers,  it  is  not  difficult  to  decide  which 
in  the  end  will  suffer.  Every  dollar  that  a  bank  loans  above 
its  capital  and  surplus  it  owes  for,  and  its  managers  are 
therefore  under  the  strongest  obligations  to  its  creditors, 
as  well  as  to  its  stockholders,  to  keep  its  discounts  constantly 
under  its  control. 

A   bank   should    treat   its    customers    liberally,    bearing    in 

mind    that    it    prospers    as    its    customers    prosper,    but    the 

customers   should  never   be   permitted   to   dictate   its   policy. 

If  the  propriety  of  discounting  an  offering  is  doubted, 
give  the  bank  the  benefit  of  the  doubt  and  decline  it.  If 
the  bank  has  any  reason  to  distrust  the  integrity  of  a 
customer,  close  his  account.  Never  deal  with  a  rascal  under 
the  impression  that  you  can  prevent  him  from  cheating  you. 
The  risk  in  such  cases  is  greater  than  the  profits. 

In  business,  know  no  man's  politics.  Manage  the  bank 
as  a  business  institution,  and  let  no  political  partiality  or 
prejudice  influence  your  judgment  or  action  in  the  conduct 
of  its  affairs. 

Pay  the  officers  such  salaries  as  will  enable  them  to  live 
comfortably  and  respectably  without  stealing,  and  require  of 
them  entire  services.  If  an  officer  lives  beyond  his  means, 
dismiss  him,  even  if  his  excess  of  expenditures  can  be 
explained  consistently  with  his  integrity,  still  dismiss  him. 
A  man  cannot  be  a  safe  officer  of  a  bank  who  spends  more 
than  he  earns. 

The  capital  of  a  bank  should  be  a  reality,  not  a  fiction, 
and  it  should  be  owned  by  those  who  have  money  to  lend, 
and  not  by  borrowers. 

Every  banker  under  the  national  system  should  feel  that 


ROMANCE  AND  TRAGEDY  OF  BANKING  31 

the  reputation  of  the  system,  in  a  measure,  depends  upon  the 
manner  in  which  his  particular  institution  is  conducted,  and 
that,  as  far  as  his  influence  and  his  management  extend,  he 
is  responsible  for  its  success.  It  should  be  the  chief  aim, 
therefore,  of  the  managers  of  the  banks,  to  make  their 
respective  institutions  strong,  not  only  to  keep  their  capital 
from  being  impaired,  but  gradually  to  create  a  surplus  that 
will  be  a  protection  to  their  capital  and  to  their  creditors 
in  the  trying  times  that  will  sooner  or  later  happen  to  all 
banking  institutions.  There  are  few  items  that  will  have 
a  better  look  upon  the  balance  sheet,  and  none  that  is  better 
calculated  to  give  aid  and  comfort  to  the  managers  of  a 
bank,  and  to  secure  for  it  the  confidence  of  the  people, 
than  a  large  surplus  fund.  Create,  then,  a  good  surplus, 
if  even  for  a  short  time  the  stockholders  have  to  be  kept  on 
short  commons  in  the  way  of  dividends  to  do  it. 

Pursue  a  straightforward,  upright,  legitimate  banking 
business.  Never  be  tempted  by  the  prospect  of  large  re- 
turns to  do  anything  but  what  may  be  properly  done  under 
the  National  Currency  Act.  "Splendid  financiering"  is  not 
legitimate  banking,  and  "splendid  financiers"  in  banking  are 
generally  humbugs   or   rascals. 

If  the  rules  laid  down  by  McCulloch  in  this  circular  were 
strictly  followed  by  bank  managers,  bank  failures  would  be  few 
and  far  between  and  losses  to  depositors  and  stockholders  would 
be  reduced  to  a  minimum. 


Appointment  as  Secretary  of  the  Treasury/ 

Mr.  McCulloch  resigned  the  position  of  Comptroller  March  8, 
1865,  to  accept  appointment  as  Secretary  of  the  Treasury,  and 
served  in  the  latter  capacity  until  March,  1869.  He  was  again 
appointed  Secretary  in  October,  1884,  by  President  Arthur,  to 
fill  the  unexpired  term  of  Secretary  Gresham,  who  resigned  to 
become  a  Circuit  Court  Judge  of  the  United  States. 

In  referring  to  his  second  appointment  as  Secretary  of  the 
Treasury,  Mr.  McCulloch,  in  his  "Men  and  Measures  of  Half  a 
Century,"  took  occasion  to  express  himself  in  the  following  com- 
plimentary terms  of  the  personnel  of  the  Department,  and  his 


32  ROMANCE  AND  TRAGEDY  OF  BANKING 

appreciation  of  the  valuable  services  rendered  the  Government 
and  himself  by  his  official  subordinates  during  his  connection  with 
the  Department: 

I  was  glad  to  see  among  officers  and  clerks  who  called 
at  my  offices  on  the  morning  that  I  entered  upon  the  dis- 
charge of  my  duties  as  Secretary,  a  number  of  familiar 
faces,  although  nearly  fifteen  years  had  passed  since  I  had 
left  the  Department,  I  shall  always  hold  in  kind  and  grate- 
ful remembrance  the  men  who  served  with  me  while  I  was 
Comptroller  of  the  Currency  and  Secretary  of  the  Treasury,  in 
a  very  interesting  and  trying  period  of  our  financial  history. 
An  immense  amount  of  work  was  done  in  that  Department 
during  the  civil  war  and  for  some  years  after,  and  although 
it  was  done  by  men  who  had  to  learn  as  they  worked,  the 
record  shows  that  it  was  fairly  well  done.  Faithfully  served 
as  the  Government  was  in  the  field,  it  was  no  less  faithfully 
served  by  the  officers  and  clerks  in  the  public  offices  in 
Washington.  There  were  among  them  men  holding 
subordinate  positions  who  were  competent  to  fill  the  highest; 
men  whose  services  could  not  be  dispensed  with  without 
detriment  to  the  Government;  such  men  as  would  in  Great 
Britain  be  retired  with  a  pension  when  they  were  no  longer 
able  to  perform  their  necessary  work,  instead  of  being 
turned  out,  as  many  have  been,  to  give  place  to  hungry 
applicants. 

Thoroughly  familiar  with  the  details  of  the  business  of  the 
Department  himself,  a  most  industrious  worker,  McCulloch  read- 
ily recognized  and  appreciated  ability,  loyalty  and  industry  in 
others,  and  unselfishly  accorded  credit  where  credit  was  due. 

Selection  of  McCulloch  to  Organize  the  Bureau 

The  selection  of  Mr,  McCulloch  as  the  first  Comptroller  of 
the  Currency  to  organize  the  Bureau  and  start  the  machinery  of 
the  national  banking  system  in  operation  was  a  most  fortunate 
one,  as  no  man  of  that  time  was  better  equipped  to  undertake  so 
difficult  a  task.  He  cherished  to  the  end  of  his  life  an  exalted 
opinion  of  the  dignity  and  importance  of  the  Comptroller's  office. 


ROMANCE  AND  TRAGEDY  OF  BANKING  33 

and  regarded  his  work  in  the  Currency  Bureau  and  the  launching 
of  the  national  banking  system  as  his  greatest  achievement.  He 
was  a  familiar  figure  around  the  Comptroller's  office  for  years 
after  his  retirement  from  public  life,  and  those  who  served  under 
him  always  entertained  for  him  the  greatest  admiration  and 
esteem.  He  never  ceased  to  take  a  deep  interest  in  the  welfare  of 
the  Bureau  and  the  improvement  and  success  of  the  national 
banking  system,  and  no  one  realized  or  appreciated  more  than  he 
the  responsibilities  of  the  Comptroller. 

On  one  occasion,  during  a  temporary  vacancy  in  the  Comp- 
trollership,  he  strolled  into  the  office,  as  he  was  in  the  habit  of 
doing  every  now  and  then,  for  the  purpose  of  paying  his  respects 
to  the  Comptroller  and  seeing  some  of  his  old  friends.  On  this 
occasion  the  Deputy  Comptroller  was  in  charge  of  the  Bureau. 
Introducing  himself,  McCulloch  said  to  the  Deputy,  "Well,  young 
man,  you  have  a  very  responsible  position."  "Oh,  I  don't  know," 
the  young  Deputy  replied,  "I  don't  see  anything  in  the  job  that  a 
man  of  ordinary  intelligence  could  not  learn  in  a  few  days."  This 
inconsiderate  remark  of  the  Deputy  did  not  please  McCulloch, 
and  was  so  repugnant  to  his  conception  of  the  importance  and 
responsibilities  of  the  position  that  he  was  taken  completely 
aback,  and  politely  wishing  the  Deputy  a  good  morning,  left  the 
room  without  another  word,  and  thus  ended  the  interview. 

Mr.  McCulloch  was  a  sturd}^  character,  a  practical  and  ex- 
perienced banker  and  financier ;  broad-minded  and  conservative 
in  all  things,  but  positive  and  tenacious  in  his  views,  especially  on 
banking  and  finance;  a  close  student  of  the  problems  of  govern- 
ment and  of  all  public  questions  that  affected  the  welfare  of  the 
nation. 

The  closing  chapter  of  his  "Men  and  Measures  of  a  Half  Cen- 
tury," written  many  years  ago,  contains  views  that  are  well  worth 
reading  by  all  thoughtful  men  in  their  application  to  the  condi- 
tions which  prevail  at  the  present  time.  He  devoted  considerable 
thought  to  the  subject  of  unrestricted  suffrage,  the  laxity  of  our 
laws  relating  to  the  elective  franchise ;  the  steadily  increasing 
hostility  between  the  poorer  classes  and  the  rich  and  between  cap- 
ital and  labor;  the  growing  concentration  of  wealth  in  the  hands 
of  a  few  whose  gains  have  not  been  wholly  the  result  of  legitimate 


34  ROMANCE  AND  TRAGEDY  OF  BANKING 

business,  but  through  monopolies   and   combinations   of  various 
kinds,  which  were  then  fast  becoming  the  controlling  power. 

Mr.  McCulloch  retired  from  active  public  life  in  March,  1885, 
at  the  close  of  President  Arthur's  administration,  and  died  at  his 
country  home  near  Washington,  D.  C,  where  he  passed  a  large 
part  of  the  last  years  of  his  life.  May  24,  1895,  at  the  ripe  age 
of  nearly  eighty-seven  years. 


FREEMAN  CLARKE 
Comptroller  of  the  Currency,  1865- 1866 


CHAPTER  IV 

« 

Freeman  Clarke 

FREEMAN  CLARKE,  of  New  York,  the  second  Comptroller 
of    the    Currency,    was    appointed    by    President    Lincoln, 
March  21,  1865,  to  succeed  Mr.  McCulloch,  but  resigned 
July  24,  1866,  having  retained  the  office  only  sixteen  months. 

Mr.  Clarke  was  born  at  Troy,  N.  Y.,  March  22,  1809,  and 
was  sixty-five  years  of  age  at  the  time  of  his  appointment  as 
Comptroller.  He  engaged  in  mercantile  pursuits  for  awhile  and 
subsequently  turned  his  attention  to  banking.  In  1837  he  was 
elected  cashier  of  the  Bank  of  Orleans  at  Albion,  N.  Y.  In  1845 
he  removed  from  Albion  to  Rochester  and  became  president  of 
the  Rochester  Bank,  treasurer  of  the  Monroe  County  Savings 
Bank,  and  subsequently  president  of  the  Monroe  County  Bank. 
He  also  held  the  office  of  treasurer  and  director  of  the  Rochester, 
Lockport  and  Niagara  Falls  Railroad  Company,  president  and 
treasurer  of  the  Rochester  and  Genesee  Valley  Railroad  Com- 
pany, director  of  the  Mobile  and  Ohio  Railroad  Company,  treas- 
urer and  director  of  the  House  Telegraph  Company,  and  a  direc- 
tor of  the  Western  Union  Telegraph  Company.  He  was  one  of 
the  first  directors  of  the  Fourth  National  Bank  of  New  York 
City,  and  also  a  trustee  and  subsequently  vice-president  of  the 
Union  Trust  Company  of  New  York.  He  was  vice-president  of 
the  Whig  State  Convention  in  1850.  In  1852  he  was  a  delegate 
to  the  Whig  National  Convention,  and  was  vice-president  of  the 
First  Republican  Convention  in  New  York  State  in  1854.  He 
was  a  Presidential  elector  in  1856,  and  in  1862  was  elected  a  rep- 
resentative from  New  York  to  the  Thirty-eighth  Congress,  serv- 
ing on  the  Committees  on  Manufactures  and  Invalid  Pensions. 
In  1867,  after  leaving  the  Comptroller's  office,  he  was  elected  to 
the  New  York  State  Constitutional  Convention.  In  1870  he  was 
again  elected  a  representative  from  New  York  to  the  Forty- 
second  Congress,  in  which  he  served  on  the  Committee  on  Appro- 

36. 


36  ROMANCE  AND  TRAGEDY  OF  BANKING 

priations,  was  re-elected  in  1872  to  the  Forty-third  Congress,  and 
was  a  member  of  the  Committee  on  Foreign  Affairs. 

He  died  at  Rochester,  N.  Y.,  June  24,  1887. 

There  is  very  little  to  be  said  of  Mr.  Clarke's  administration 
as  Comptroller  of  the  Currency,  as  he  remained  in  office  a  very 
short  time,  and  nothing  occurred  during  his  brief  term  of  any 
particular  moment,  except  the  steady  growth  and  development 
of  the  national  banking  system.  During  his  term,  over  two  hun- 
dred and  eighty-three  new  banks  were  added  to  the  system  and 
seven  hundred  and  thirty-one  State  banks  were  converted  into 
national  associations. 

The  first  failure  of  a  national  bank  occurred  during  Mr. 
Clarke's  administration.  This  was  the  First  National  Bank  of 
Attica,  N.  Y.,  for  which  a  receiver  was  appointed  April  14,  1865, 
the  date  of  the  assassination  of  President  Lincoln,  although  the 
death  of  the  President  had  no  bearing  whatever  upon  the  closing 
of  the  bank.  The  failure  was  due  to  injudicious  banking  and  in- 
solvency of  large  debtors.  This  was  a  small  bank,  with  capital 
of  $50,000,  and  total  assets  of  only  $208,106. 

It  is  evident  from  this  failure  that  the  good  advice  which  Mr. 
McCulloch  gave  in  his  circular  letter  of  instructions  to  bank  man- 
agers, hereinbefore  quoted,  to  "distribute  the  loans  rather  than 
concentrate  them  in  a  few  hands,"  was  not  heeded  by  the  man- 
agers of  this  institution,  and  disaster  was  the  consequence. 

Unfortunately,  the  same  may  be  truthfully  said  of  many  other 
banks  in  the  long  line  of  failures  that  have  occurred  since  the  in- 
auguration of  the  national  system.  The  loans  of  a  bank  should 
be  diversified  as  fully  as  possible  and  not  concentrated,  as  is  so 
often  the  case,  in  a  few  or  affiliated  interests,  to  such  an  impru- 
dent extent  that  the  failure  of  one  individual  or  interest  may  seri- 
ously impair  the  surplus  of  the  bank,  or  threaten  the  institution 
with  an  impairment  of  its  capital,  if  not  insolvency. 

It  has  been  repeatedly  asserted  that  no  national  bank  ever 
failed  whose  managers  conducted  its  business  within  the  pro- 
visions and  limitations  of  the  national  banking  laws.  While  this 
statement  is  true  so  far  as  violations  of  law  by  the  managers  of 
banks  that  have  failed  is  concerned,  it  is  not,  however,  impossible 
for  a  bank  to   fail  whose  affairs   haA'e  been   conducted   entirely 


ROHklANCE  AND  TRAGEDY  OF  BANKING  37 

within  the  limitations  of  the  statute.  Failures  may  occur,  with- 
out the  law  having  been  violated,  through  injudicious  banking 
within  the  restrictions  of  law,  but  beyond  the  limitations  of  pru- 
dence and  safety,  as  will  be  shown  further  on  in  this  volume. 


Clarke's  Annual  Report  to  Congress 

The  principal  topics  discussed  by  Mr.  Clarke  in  his  first  and 
only  report  as  Comptroller  of  the  Currency,  were  the  evils  result- 
ing from  a  redundant  and  irredeemable  currency  and  an  adjust- 
ment of  the  tariff  so  as  to  prevent  a  drain  upon  the  gold  resources 
of  the  country  by  an  excess  of  imports  over  exports. 

A  discussion  of  the  tariff,  while  seemingly  out  of  place  in  a 
report  of  the  Comptroller  of  the  Currency,  had  a  direct  bearing 
in  this  instance  upon  the  subject  under  consideration  by  Mr. 
Clarke — the  resumption  of  specie  payments. 

The  unwritten  history  of  the  Comptroller's  office  is  authority 
for  the  statement  that  the  Comptroller  and  the  Secretary  of  the 
Treasury  were  not  in  harmony  in  their  views  on  the  tariff  ques- 
tion, and  that  the  relations  between  the  Comptroller  and  his  dep- 
uty were  also  strained,  which  made  the  position  of  the  former 
decidedly  unpleasant  and  led  to  his  early  resignation  and  retire- 
ment from  the  service,  and  the  appointment  of  the  Deputy  Comp- 
troller, Hiland  R.  Hulburd,  his  successor. 

Bank  Failures  During  Mr.  Clarke's  Administration 

There  were  two  other  national  bank  failures  during  Mr. 
Clarke's  administration,  the  Venango  National  Bank  of  Franklin, 
Pa.,  and  the  Merchants  National  Bank  of  Washington,  D.  C. 
The  former  was  placed  in  the  hands  of  a  receiver  May  1,  1866, 
and  the  latter  May  8,  1866.  The  capital  stock  of  these  banks 
was  $300,000  and  $200,000  respectively. 

On  the  date  of  failure  of  the  Merchants  National  Bank,  a 
resolution  was  adopted  by  the  House  of  Representatives  direct- 
ing the  Committee  on  Banking  and  Currency  to  make  an  investi- 
gation of  the  cause  of  the  failure  of  these  two  banks,  and  to 
report  to  the  House  the  amount  of  Government  money  deposited 


oC: 'i;,o 


38  ROMANCE  AND  TRAGEDY  OF  BANKING 

therein,  with  a  recommendation  for  any  additional  legislation 
found  to  be  necessary  to  protect  the  public  and  the  Government 
in  their  dealings  with  national  banks. 

The  report  of  the  Committee  shows  that  the  Merchants  Na- 
tional Bank  was  organized  in  September,  1864,  by  eleven  share- 
holders, all  of  whom  were  resident  business  men  of  Washington, 
except  one,  who  resided  in  Prince  George  County,  Maryland. 
William  Ba\'ne,  a  brother  of  L.  P.  Bayne,  of  the  firm  of  Bayne  & 
Company,  of  Baltimore,  was  its  first  president. 

Shortly  after  the  bank  was  chartered,  it  was  designated  a 
public  depositary,  and  security  to  the  amount  of  $100,000  was 
deposited  with  the  United  States  Treasury  for  public  moneys. 
At  the  time  of  the  failure,  the  public  money  on  deposit  in  this 
bank  amounted  to  $765,572.  The  house  of  Bayne  &  Company  of 
Baltimore  was  the  principal  debtor  of  the  bank.  The  liabilities 
of  this  concern  to  the  association  amounted  to  a  sum  nearly  equal 
to  the  public  money  deposit,  for  which  the  bank  held  no  security 
whatever.  The  largest  part  of  the  indebtedness  was  for  seven- 
thirty  United  States  bonds,  which  had  been  transmitted  by  the 
bank  to  this  company.  These  bonds  were  issued  under  authority 
of  the  Act  of  July  17,  1861,  and  bore  interest  at  the  rate  of  seven 
per  cent.  The  amount  of  the  issue  was  $139,999,750.  While 
the  books  of  the  bank  falsely  showed  this  company's  indebtedness 
to  be  only  $283,586,  even  this  large  liability  was  concealed  from 
the  Comptroller  of  the  Currency  by  reporting  it  as  only  $20,900 
and  representing  the  difference  as  bonds  in  bank. 

The  committee  reported  that  the  testimony  taken  proved  the 
management  of  the  bank  to  have  been  in  the  highest  degree  illegal, 
improvident,  reckless  and  dishonest ;  that  its  failure  was  caused 
by  extravagant  and  unreasonable  credits  allowed  to  Bayne  & 
Company  without  security,  and  the  failure  of  this  firm  necessar- 
ily involved  the  bank.  Before  the  failure  of  the  bank,  William 
Bayne,  its  first  president,  had  been  succeeded  by  Leonard  Huyck, 
the  former  cashier. 

It  appears  from  the  testimony  that  a  most  pernicious  system 
had  been  adopted  and  followed  by  Huyck  in  connection  with 
Oscar  King,  one  of  the  directors,  and  another  party  named  H.  G. 
Fant,  by  which  they  undertook  to  procure  deposits   of  public 


ROMANCE  AND  TRAGEDY  OF  BANKING  39 

moneys  by  Government  disbursing  officers,  for  which  the  director 
and  his  associate  received  interest  for  having  influenced  them  to 
open  accounts  with  the  bank.  King  was  the  bondsman  of  a  United 
States  Paymaster,  whose  deposit  he  procured.  A  member  of  the 
firm  of  Bayne  &  Company,  also  a  director,  was  the  other  bonds- 
man. It  was  shown  by  the  testimony  that  King  induced  this  pay- 
master to  make  a  deposit  amounting  to  over  $500,000,  for  the 
purpose  of  assisting  the  bank,  which  was  known  to  be  embar- 
rassed. Of  the  $765,572  of  public  moneys  deposited  in  the  bank 
at  the  time  of  the  failure,  all  but  $7308  was  paymasters'  or  dis- 
bursing officers'  accounts. 

It  appears  from  the  testimony  that  the  officials  making  the 
deposits  had  no  knowledge  of  the  payment,  to  the  director  and 
his  associates,  of  interest  on  their  accounts  and  that  they  derived 
no  benefit  from  the  deposits.  The  payment  of  interest  on  these 
accounts  appears  to  have  been  arranged  by  the  president  of  the 
bank,  without  the  knowledge  or  concurrence  of  the  cashier  or  the 
board  of  directors. 

In  April,  1866,  at  the  time  of  the  impending  failure  of  Bayne 
&  Company,  King  suggested  to  the  cashier  of  the  bank  the  possi- 
bility of  procuring  a  large  deposit  from  Paymaster  Paulding  of 
the  Army.  The  Government  funds  to  the  credit  of  this  officer 
were  then  on  deposit  in  the  First  National  Bank  of  Washington, 
a  designated  public  depositary.  Under  the  regulations  of  the 
Pay  Department  of  the  Army  the  transfer  of  these  funds,  or  any 
part  of  them,  from  one  designated  depositary  to  another  was 
prohibited  without  the  authorization  of  the  Department.  It  was 
then  proposed  to  have  the  officers  of  the  First  National  Bank 
make  the  transfer,  but  neither  the  president  nor  the  cashier  of 
the  bank  would  agree  to  this.  Paymaster  Paulding  already  had 
a  very  large  deposit  in  the  Merchants  National  Bank,  and  with 
a  view  to  saving  this  deposit  by  assisting  the  bank  in  its  emer- 
gency he  requested  the  cashier  of  the  First  National  Bank  to  look 
into  the  condition  of  the  former  institution  and  to  ascertain 
whether  or  not  it  would  be  safe  for  him  to  increase  his  deposit. 

The  cashier  made  inquiry  as  to  the  condition  of  the  Merchants 
National  Bank,  and  learning  that  its  chief  asset  was  the  indebted- 
ness of  Bayne  &  Company,  declined  to  advise  Paymaster  Pauld- 


40  ROMANCE  AND  TRAGEDY  OF  BANKING 

ing  one  way  or  the  other,  leaving  it  to  his  discretion  to  act  upon 
his  own  responsibility,  with  the  understanding,  however,  that  if 
his  checks  were  presented  at  the  First  National  Bank  they  would 
be  honored.  On  the  same  day  the  Paymaster's  checks  were  pre- 
sented by  the  cashier  of  the  Merchants  National  for  two  hundred 
thousand  dollars,  and  were  paid  and  placed  to  the  credit  of 
Bayne  Sz  Company  through  different  concerns  in  New  York, 
except  such  as  were  paid  in  cash  for  Bayne  &  Company's  benefit. 

It  also  appears  from  the  testimony  that  $50,000  was  secured 
from  Paymaster  Robinson  by  transfer  of  public  moneys  to  his 
credit  in  the  Bank  of  the  Metropolis,  upon  representations  made 
to  him  that  the  Merchants  National  was  embarrassed  and  needed 
assistance.  This  amount  was  apparently  used  by  the  cashier  of 
the  Merchants  National  to  pay  his  individual  debts  to  the  cashier 
of  the  Bank  of  the  Metropolis  and  to  the  bank  itself,  instead  of 
for  the  purpose  of  supplying  the  Merchants  National  with  the 
additional  currency  which  its  officers  represented  it  needed  so 
badly. 

The  day  following  this  $50,000  deposit  Paymaster  Robinson 
became  uneasy  as  to  the  safety  of  the  funds  in  this  bank,  and 
transferred  his  entire  balance,  amounting  to  $51,252,  to  the 
credit  of  the  Treasurer  of  the  United  States. 

It  also  appears  that  the  $200,000  deposited  by  Paymaster 
Paulding  was  remitted  to  Bayne  &  Company,  under  an  agreement 
that  the  lai-ge  amount  of  securities  held  by  that  company  would 
be  released  and  returned  to  the  bank,  but  the  only  securities  that 
appear  to  have  been  returned  were  850  shares  of  the  stock  of  the 
Washington,  Georgetown  and  Alexandria  Railroad  Company, 
which  the  cashier  of  the  bank  took  possession  of,  claiming  them 
to  be  his  individual  property.  The  cashier  was  the  treasurer  of 
this  railroad  company.  He  testified  before  the  committee  that 
he,  as  treasurer  of  the  railroad  company,  issued  to  Bayne  & 
Company  2850  shares  of  the  stock  of  the  company,  of  the  par 
value  of  $285,000,  under  a  promise  of  Bayne  &  Company  to 
return  to  him  genuine  certificates  to  replace  this  issue,  but  that 
the  stock  never  was  returned,  consequently  there  was  an  over- 
issue of  the  stock  of  the  railroad  company  to  that  amount. 


ROMANCE  AND  TRAGEDY  OF  BANKING  41 

In  October,  1865,  there  was  a  change  in  the  officers  of  the 
bank.  William  Bayne  resigned  as  president,  and  the  cashier, 
Leonard  Huyck,  was  appointed  to  succeed  him,  and  Charles  A. 
Sherman  was  made  cashier.  In  January,  1866,  C.  W.  Boteler, 
one  of  the  original  organizers  of  the  bank,  was  appointed  vice- 
president.  Mr.  Boteler  testified  that  although  the  By-Laws  of 
the  bank  required  weekly  meetings  of  the  board  of  directors, 
practically  no  meetings  were  held.  Whenever  a  quorum  of  the 
board  happened  to  be  present  on  meeting  days  Mr.  Huyck  would 
inform  them  that  there  was  no  business  for  them  to  transact. 
Although  a  Finance  Committee,  composed  of  the  president,  the 
vice-president  and  the  cashier,  were  authorized  to  transact  all 
the  business  of  the  board,  Mr.  Boteler,  the  vice-president,  finding 
that  lie  was  not  consulted  in  regard  to  loans  or  other  important 
business  of  the  bank,  had  a  resolution  passed  by  the  board  pro- 
hibiting any  loans  being  made  except  by  the  unanimous  consent 
of  the  Finance  Committee.  Notwithstanding  this  fact,  it  appears 
that  the  president  of  the  bank  continued  to  act  as  though  the 
bank  were  his  own  and  neither  consulted  Mr.  Boteler  nor  the 
cashier  in  regard  to  his  transactions. 

This  bank  seemed  to  have  started  upon  an  iniquitous  career 
from  the  very  beginning.  The  name  of  J.  B.  Stewart  appears  as 
one  of  the  original  subscribers  for  600  shares,  or  $60,000  of  the 
capital  stock.  Stewart  testified  that  he  never  subscribed  for  any 
shares,  that  he  never  signed  the  organization  certificate,  had  never 
owned  or  transferred  any  stock,  nor  attended  any  meetings  of  the 
stockholders  or  directors,  and  that  he  never  knew  any  of  the  stock 
of  the  bank  stood  in  his  name  until  he  saw  a  published  list  of  the 
stockholders  at  the  time  of  the  failure.  The  notary  public  before 
whom  the  organization  certificate  bearing  Mr.  Stewart's  signa- 
ture was  acknowledged  testified  that  at  the  time  of  the  acknowl- 
edgment of  the  signatures  to  the  certificate  he  looked  around  and 
saw  that  all  of  the  signers  were  present,  except  Mr.  Stewart,  and 
that  he  certified  that  Mr.  Stewart  was  present  because  Mr.  Oscar 
A.  Stevens,  who  signed  Stewart's  name  to  the  paper,  was  present, 
and  as  Stevens  often  attended  to  business  for  Mr.  Stewart  he 
assumed  that  it  was  all  right  and  certified  to  Stewart's  personal 
acknowledgment  of  his  signature. 


42  ROMANCE  AND  TRAGEDY  OF  BANKING 

Stewart  testified  that  when  the  bank  commenced  business  he 
opened  an  account  with  it  and  arranged  to  draw  for  money  as 
he  should  require  it,  depositing  950  shares  of  stock  of  the  Wash- 
ington, Alexandria  and  Georgetown  Railroad  Company  as  secur- 
ity, and  that  he  also  deposited  with  the  bank  for  safe  keeping 
$169,000  of  bonds  of  the  Union  Pacific  Railroad  Company  which 
he  held  in  trust.  These  bonds,  Stewart  stated,  he  learned  shortly 
before  the  bank  failed  had  been  sent  by  Huyck,  the  president,  to 
Bayne  &  Company,  and  by  that  firm  hypothecated  for  loans  from 
various  banks  in  Baltimore  without  his  knowledge  or  consent,  and 
when  he  called  at  the  bank  after  the  failure  to  pay  his  loan  secured 
by  the  railroad  stock  he  found  that  this  stock  had  also  been 
abstracted  and  disposed  of  in  the  same  manner  as  the  bonds. 

It  is  plainly  evident  from  this  testimony  and  other  facts 
brought  to  light  by  the  Investigating  Committee  that  this  bank 
from  the  very  outset  was,  as  stated  by  the  committee,  in  the  hands 
of  a  reckless,  unscrupulous  and  dishonest  management. 

The  report  of  the  committee  in  commenting  on  the  indiscrimi- 
nate depositing  of  public  moneys  by  disbursing  officers  in  banks 
of  their  own  selection  severely  censured  Paymaster  Paulding  for 
using  public  funds  to  save  the  Merchants  National  Bank  and 
Bayne  &  Company  from  failure. 

In  regard  to  the  deposits  of  the  other  disbursing  officers,  the 
committee  stated  that  while  it  did  not  appear  that  such  deposits 
were  made  for  an  unlawful  purpose  or  that  the  disbursing  officers 
received  any  benefit  directly  or  indirectly  from  them,  the  only 
reason  for  making  some  of  these  deposits  appeared  to  be  a  desire 
on  the  part  of  these  disbursing  officers  to  gratify  a  vanity  in 
patronizing  the  banks  by  displaying  the  control  the}'  exercised 
over  the  public  moneys  to  their  credit.  One  of  the  disbursing 
officers  testified  that  the  only  inducement  that  influenced  him  to 
withdraw  money  from  the  Treasury  Department  and  deposit  it 
in  the  Merchants  National  Bank  was  that  he  thought  the  First 
National  Bank  of  Washington  had  more  than  its  share  of  public 
money,  and  wishing  to  see  the  public  funds  more  faix'ly  distrib- 
uted among  the  national  banks,  he  withdrew  $25,000  from  the 
Treasury  and  deposited  it  in  the  Merchants  National  Bank  only 
a  few  days  befoi'e  its  failure. 


ROIVIANCE  AND  TRAGEDY  OF  BANKING  43 

The  committee,  as  a  result  of  the  conditions  revealed  by  this 
investigation,  reported  a  bill  which  became  a  law,  taking  from 
disbursing  officers  all  control  in  the  selection  of  banks  in  which 
to  keep  the  public  funds  intrusted  to  them.  The  committee  ex- 
pressed the  opinion,  however,  that  the  Treasury  Department  had 
given  a  construction  to  the  law  not  contemplated  by  the  com- 
mittee, which  seemed  to  take  away  much  of  its  efficiency. 

The  report  of  the  committee  concluded  with  a  recommenda- 
tion for  the  adoption  of  a  resolution  submitted  directing  the  Sec- 
retary of  War  to  institute  such  legal  proceedings  as  should  be 
deemed  necessary  for  the  punishment  of  the  managers  of  the 
Merchants  National  Bank,  and  others  who  aided  or  abetted  them 
in  committing  a  breach  of  trust  by  misapplying  the  public  money 
intrusted  to  them  for  safe  keeping,  and  also  such  proceedings  as 
should  be  found  necessar}^  to  i-ecover  any  portion  of  such  money. 

The  committee  also  sent  a  circular  letter  to  each  and  every 
national  bank  designated  as  a  public  depositary,  requiring  the 
bank  to  prepare  and  forward  to  the  Committee  on  Banking  and 
Currency  a  statement  showing  the  amount  of  money  standing  to 
the  credit  of  the  United  States  or  the  United  States  Treasurer, 
any  disbursing  officer  or  agent  of  the  United  States,  the  name  of 
such  officer  or  agent,  and  the  amount  to  the  credit  of  each  as 
shown  by  the  books  of  the  bank  in  May,  1866. 

An  assessment  of  one  hundred  per  cent,  was  levied  by  the 
Comptroller  upon  the  stockholders  of  the  Merchants  National 
Bank  to  pay  the  debts  of  the  association,  but  only  $16,488  of 
the  $200,000  liability  was  collected.  The  total  collections  by  the 
receiver  from  all  sources  amounted  to  $312,992,  while  the  amount 
of  the  claims  proved  against  the  bank  was  $669,513,  on  which 
they  received  dividends  of  only  24.70  per  cent.  The  receivership 
was  finally  closed  May  14,  1883. 

Failure  of  the  Venango  National  Bank 

The  failure  of  the  Venango  National  Bank  of  Franklin,  Pa., 
was  investigated  by  the  same  committee.  This  bank  was  a  desig- 
nated public  depositary.  At  the  time  of  its  failure  the  public 
moneys  on  deposit  amounted  to  about  $291,467,  while  the  securi- 


44     KOMANCE  AND  TRAGEDY  OF  BANKING 

ties  held  by  the  Treasury  Department  to  protect  such  deposits- 
amounted  to  only  $50,000. 

This  bank  seemed  to  have  been  operated  in  the  interest  of  Cul- 
ver, Fenn  &  Company  of  New  York,  in  the  same  manner  that  the 
Merchants  National  Bank  was  managed  for  the  benefit  of  Bayne 
&  Company  of  Baltimore.  Their  transactions  with  each  other  were 
very  similar  and  the  results  were  the  same.  Bayne  &  Company 
failed  owing  the  Merchants  National  Bank  several  hundred  thou- 
sand dollars.  The  bank  failed  in  consequence.  Culver,  Penn  & 
Company  failed  owing  the  Venango  National  Bank  over  $600,000. 
The  failure  of  the  bank  followed.  Both  banks  wholly  disregarded 
the  law  in  respect  to  the  limit  of  loans.  Bayne  &  Company  hy- 
pothecated or  sold  securities  of  the  Merchants  National  Bank. 
Culver,  Penn  &  Company  did  likewise  with  Government  bonds 
belonging  to  the  Venango  National  Bank,  deposited  with  the  firm 
for  safe  keeping. 

One  hundred  per  cent,  assessment  was  levied  upon  the  stock- 
holders of  this  bank  by  the  Comptroller  to  make  up  the  deficiency 
in  its  assets  to  meet  its  liabilities,  but  only  $1245  was  collected 
from  this  source  out  of  a  total  stock  liability  of  $300,000.  The 
total  claims  proved  amounted  to  $434,531,  but  the  total  collec- 
tion from  all  sources  amounted  to  only  $122,240.  The  dividends 
paid  on  the  proved  claims  aggregated  only  23.37  per  cent.  The 
receivership  was  finally  closed  February  2,  1885. 

In  the  course  of  the  investigation  of  these  two  bank  failures 
it  was  developed  that  many  of  the  State  banks  that  had  converted 
into  national  associations  did  not  make  proper  effort  to  with- 
draw their  old  circulation,  but  in  many  instances  continued  to 
pay  it  out  and  keep  the  old  State  bank  notes  in  circulation, 
thereby  receiving  the  benefit  of  both  their  State  and  National 
bank  circulation.  In  some  instances  such  banks  reported  to  the 
Comptroller  that  the  old  circulation  had  been  withdrawn  when 
it  was  actually  being  paid  out.  Banks  in  Massachusetts,  Rhode 
Island,  New  York  and  New  Jersey  were  reported  as  engaged  in 
this  practice.  Some  banks  were  reported  as  not  engaged  in  a 
legitimate  banking  business  but  were  organized  as  national  asso- 
ciations simply  for  the  benefit  of  the  circulation  privilege.     Such 


ROMANCE  AND  TRAGEDY  OP  BANKING  45 

banks  were  mostly  owned  by  brokers  and  private  bankers  and 
were  operated  in  conjunction  with  their  office  business. 

One  bank  of  this  character  in  Michigan  was  a  designated 
depositary  of  the  United  States,  but  when  it  was  examined  the 
only  account  on  its  books  was  a  credit  of  $17,083  to  the  Treas- 
urer of  the  United  States,  for  which  the  Government  held  $50,000 
of  United  States  bonds  as  security. 

The  committee  expressed  the  opinion  that  the  national  bank- 
ing laws,  as  they  existed  at  that  time,  did  not  confer  the  power 
to  correct  and  prevent  many  of  the  objectionable  practices  and 
abuses  that  the  banks  were  found  to  be  engaged  in,  and  a  bill 
was  therefore  reported  to  give  to  the  Comptroller  of  the  Cur- 
rency the  necessary  authority  to  restrain  banks  which  he  knew 
to  be  improperly  managed. 

The  facts  revealed  by  the  investigation  of  the  causes  which 
led  to  the  failure  of  these  two  banks  and  subsequently  of  other 
national  institutions  demonstrates  that  speculation,  dishonesty 
and  injudicious  management  in  banking  has  not  been  confined  to 
any  particular  period  in  the  life  of  the  national  system,  but  that 
banking  in  the  early  years  developed  traits  of  character  in  indi- 
viduals and  banking  methods  as  unwholesome  and  pernicious  as 
any  that  have  been  discovered  in  later  years. 

Removal  of  the  Currency  Bureau  to  New  York 

No  amendments  to  the  National  Bank  Act  were  passed  dur- 
ing Mr.  Clarke's  administration.  But  he  renewed  the  recom- 
mendation of  his  predecessor,  Mr.  McCulloch,  for  the  separation 
of  the  Currency  Bureau  from  the  Treasury  Department  and  its 
removal  to  New  York  City.  He  expressed  the  opinion  that  both 
the  interests  of  the  Government  and  the  banks  Avould  be  subserved 
by  such  a  change.  He  claimed  that  the  location  of  the  bureau 
at  the  financial  center  of  the  country  would  not  only  be  a  great 
convenience  to  those  who  were  engaged  in  the  banking  business, 
but  would  be  more  economical  to  the  Government  and  to  the 
banks  in  the  saving  of  express  charges  for  transportation  of 
mone}^,  time,  risk  and  loss  of  interest.  Mr.  Clarke  did  not  urge 
AS  one  of  the  reasons  for  a  change  of  location,  as  did  his  prede- 


46     ROMANCE  AND  TRAGEDY  OF  BANKING 

cesser,  that  the  bureau  would  be  freer  from  political  and  finan- 
cial influences  by  its  removal  from  Washington,  and  it  is  not 
believed  that  either  he  or  McCulloch,  if  living  today,  would  enter- 
tain the  same  views  as  to  the  necessities  for  a  change  of  location 
of  the  bureau  or  its  separation  from  the  Treasury  Department 
as  they  expressed  at  the  time  they  made  this  suggestion. 


HILAND  R.  HULBURD 
Comptroller  of  the  Currency,  1867-1872 


CHAPTER  V 

Hiland  R.  Hulburd 

HILAND  R.  HULBURD,  the  third  Comptroller  of  the 
Currency,  was  appointed  February  1,  1867,  and  served 
until  AprH  3,  1872. 

Mr.  Hulburd  was  born  in  1829,  at  Worthington,  near  Colum- 
bus, Ohio.  His  father  was  a  Presbyterian  clergyman  of  consid- 
erable note.  Mr.  Hulburd  graduated  at  an  early  age  from  the 
Western  Reserve  College  at  Hudson,  Ohio.  He  studied  law  in  the 
office  of  Anthony  Howard  Dunlevy  of  Lebanon,  Ohio,  and  was 
admitted  to  the  bar.  In  1865  he  was  appointed  registrar  of  the 
Banking  Department  of  the  State  of  Ohio.  On  August  1,  1865, 
he  was  appointed  Deputy  Comptroller  of  the  Currency  under 
Hugh  McCulloch,  and  acted  as  Comptroller  during  the  vacancy 
in  that  office  from  July  24,  1866,  to  February  1,  1867,  when  he 
was  appointed  Comptroller. 

After  his  retirement  from  the  Comptrollership  until  the  date 
of  his  death  he  spent  most  of  his  time  in  New  York  City.  Dur- 
ing the  last  years  of  his  life  he  was  connected  with  oil  interests 
in  Pennsylvania  and  had  an  office  in  New  York  City.  He  lost  his 
life  in  the  burning  of  the  steamer  Seawanhaka  on  Long  Island 
Sound,  June  28,  1880. 

Although  the  national  banking  system  was  in  its  infancy  dur- 
ing Mr.  Hulburd's  incumbency  of  the  office  of  Comptroller  his 
annual  reports  to  Congress,  six  in  number,  are  replete  with  inter- 
esting matter  and  compare  favorably  with  the  best  that  have 
emanated  from  the  Currency  Bureau.  Subsequent  experience 
demonstrated  the  soundness  of  his  views  on  banking  questions  and 
practices  and  the  correctness  of  his  conclusions  in  regard  to  the 
subjects  discussed. 

Payment  of  Interest  on  Bank  Balances 

In  his  earlier  reports  Mr.  Hulburd  devoted  a  good  deal  of 
attention  to  the  practice  which  prevailed  to  some  extent  among 

47 


48     ROMANCE  AND  TRAGEDY  OF  BANKING 

the  banks  at  that  time  of  paying  interest  on  bank  balances.  He 
criticised  and  condemned  this  practice  in  severe  terms,  and  quoted 
the  Chancellor  of  the  Exchequer  of  England  as  declaring  in  his 
comments  on  the  causes  which  led  to  the  crisis  of  1857,  as  "one 
eminently  liable  to  abuse,  and  containing  within  it  the  elements 
of  danger." 

Notwithstanding  the  criticisms  of  Mr.  Hulburd,  however, 
this  practice,  which  he  so  strongl}'  condemned  in  1867,  steadily 
increased  with  the  growth  of  the  national  system  until  it  became 
almost  a  universal  custom  among  the  banks,  the  evil  effects  of 
which,  as  he  predicted,  were  shown  in  some  of  the  panics  of  later 
years. 

The  contention  of  Mr.  Hulburd  was  that  country  banks 
should  keep  deposits  with  city  banks  only  for  the  purpose  of 
facilitating  exchanges  in  carrying  on  their  own  legitimate  busi- 
ness, and  that  the  funds  so  placed  should  not  be  allowed  to  exceed 
the  amount  actuallv  necessary  for  the  current  demands  of  their 
business.     He  contended  that — 

The  payment  of  high  rates  of  interest  on  bank  balances 
attracts  all  the  spare  capital  from  the  country  to  the 
commercial  centers.  It  is  drawn  away  from  the  country 
where  it  is  needed  to  the  business  centers  where  the  rate 
of  interest  is  higher.  The  cities  then  come  in  competition 
with  the  country  and  compel  borrowers  in  the  country  to 
pay  higher  rates  for  loans. 

He  quoted  M.  Pereire,  the  President  of  the  Credit  Mobilier 
of  France,  as  saying  that  "Banks  are  instituted  only  to  lower  the 
rate  of  interest  and  they  fail  in  their  mission  when  they  do  not 
fulfill  that  character."    Mr.  Hulburd  said: 

The  city  banks  by  the  payment  of  interest 
offer  a  premium  for  deposits,  the  volume  of  which 
should  be  regulated  only  by  the  ebb  and  flow  of  trade.  An 
artificial  stimulant  is  applied,  in  order  to  accumulate  funds 
in  excess  of  the  natural  demand.  So  long  as  the  country 
banks  can  employ  their  means  more  profitably  at  home, 
they  will  do  so,  but  when  their  own  trade  is  dull  they  will 


KOMANCE  AND  TRAGEDY  OF  BANKING  49 

send  their  money  to  the  business  centers.     And  it  so  happens 
that  the   city  banks   will   secure  the   greatest   abundance   of 
means  exactly  at  the  time  when  they  have  the  least  use  for 
them.     But,  as  they  pay  interest  for  such  deposits,  they  must 
be  used.     The  city  banker  becomes   a  broker,  seeking  after 
investments.     He  must  get  more  interest  than  he  pays,  or  he 
will  lose  money.     He  must  loan  it  on  call,  for  it  is  payable 
on  demand,  and  it  always  will  be  demanded  when  he  wants  it 
the  most.     Deposits  are  the  reserve  of  the  country,  and  the 
deposits   of  the   country  banks   at  the   centers   of  trade   are 
their  reserves  for  all  demand  liabilities.     Banks  were  requir- 
ed by  law  to  keep   a   reserv^e   of   fifteen   per   cent,    of   their 
deposits,  three-fifths  of  which  may  consist  of  balances   due 
from  the  city  banks.  Forbidden  to  use  their  reserve  in  their 
ovm  business,  they  remit  it  to   New   York,   where   it  is   not 
held  in  reserve,  but  is  loaned  to  stockbrokers  and  speculators. 
Receiving    interest    on    the    amount    under    the    name    of    a 
dej>osit,  they  really  loan  it  on  call  to  the  city  banks,  which 
in  turn  loan  it  at  a  higher  rate  of   interest. 

A  bank  may  know  the  character  of  its  individual  deposits, 
and   may   be   able   to   judge   with    some   degree    of   accuracy 
of  the  extent  to  which  it  would  be  safe  to  use  them.     But 
of  the  deposits  of  another  bank  and  of  the  causes  that  may 
create  a  demand  by  its  customers,  no  reliable  estimate  can 
be  formed  further  than  that  such  deposits  reach  their  maxi- 
mum at  the  dullest  season  of  the  year,  and  their  minimum 
at   the    season    of   the    greatest   activity    in    business.      Bank 
balances   are  working  balances,  not  surplus   capital   seeking 
investment.     They  ought  not  greatly  to  exceed  the   amount 
necessary  for  the  convenient  transaction   of  business.      The 
city  banks  are  equally  interested  with  the  country  banks  in 
preserving  healthy  and  natural  relations  between  the  centers 
of  trade  and  their  tributaries.     Anv  influence  that  interferes 
with  such  relations  cannot  be  beneficial,  and  the  allowance  of 
interest  is   an   unnecessary   interference,   the   termination   of 
which    would    promote   the    interest    of    both    parties    to    the 
arrangement  and  secure  greater  safety  to  the  public  whose 
reserve   funds   are   at   stake   under   the   practice   alluded   to. 

Mr.  Hulburd,  therefore,  was  of  the  opinion  that  the  funds 
required  by  law  at  that  time  to  be  held  in  reserve  by  country 


50     ROMANCE  AND  TRAGEDY  OF  BANKING 

banks  for  the  protection  of  depositors  should  not  be  loaned  to 
the  city  banks  on  interest.  But  the  practice  that  he  complained 
of  in  1867  continued  and  prevailed  to  a  far  greater  extent  in 
later  years.  Country  banks  deposited  their  surplus  funds  with 
city  banks,  not  for  the  purpose  of  facilitating  exchange  in  carry- 
ing on  their  legitimate  business,  but  largely,  if  not  wholly,  for 
the  greater  interest  rates  they  derived  therefrom. 

Operation  of  the  Reserve  Laws 

To  more  clearly  illustrate  the  operation  of  the  old  law  in 
this  respect  let  it  be  assumed  that  a  country  bank  having  net 
deposits  of  $1,000,000  was  required  to  maintain  a  reserve  in 
lawful  money  of  fifteen  per  cent. — $150,000.  Two-fifths  of  this 
amount,  $60,000,  was  required  to  consist  of  cash  in  bank,  and 
the  remaining  three-fifths,  $90,000,  might  consist  of  balances  due 
from  approved  reserve  agents  in  reserve  cities. 

Now  this  country  bank  had  on  hand  $90,000  of  its  own 
notes,  or  the  notes  of  other  national  banks,  which  could  not  be 
counted  as  reserve.  In  order  to  make  these  notes  available  for 
reserve  purposes  the  bank  sent  them  to  its  reserve  agent  and 
received  credit  for  a  like  amount  as  lawful  money  reserve. 

The  reserve  city  bank  from  which  this  credit  was  due  was 
required  to  carry  a  reserve  against  this  deposit  of  twenty-five  per 
cent.,  or  $22,500.  One-half  of  this  amount,  or  $11,250,  might 
consist  of  a  balance  due  from  its  reserve  agent  located  in  a  cen- 
tral reserve  cit}^  The  bank  could  not  count  any  part  of  the 
$90,000  of  national  bank  notes  received  from  the  country  bank 
as  reserve  so  it  sent  the  entire  amount  to  its  central  reserve  city 
agent,  received  credit  therefor,  and  counted  $11,250  of  such 
credit  as  part  of  the  lawful  money  reserve  required  to  be  held 
against  the  .$90,000  deposit  of  the  country  bank. 

The  central  reserve  city  bank  was  required  to  carry  a  reserve 
in  lawful  money  of  twenty-five  per  cent.,  all  of  which  was  required 
to  be  held  in  its  own  vaults.  No  part  of  the  national  bank  notes 
received  from  its  reserve  city  correspondent  could  be  counted  as 
reserve,  so  the  whole  amount  was  shipped  to  Washington  for  re- 
demption and  the  bank  received  in  exchange  therefor  an  equal 
amount  of  legal-tender  notes. 


ROMANCE  AND  TRAGEDY  OF  BANKING  51 

The  $90,000  notes  of  the  country  bank  were  redeemed  and 
charged  by  the  Treasurer  of  the  United  States  to  the  bank's  five 
per  cent,  redemption  fund  and  such  of  the  notes  as  were  fit  for 
use  were  returned  to  the  country  bank  and  new  notes  were  issued 
in  place  of  those  destroyed  as  unfit  for  circulation.  Then  the 
process  above  described  was  renewed  in  an  endless  chain 
operation. 

Now  how  much  lawful  money  reserve  was  actually  held  against 
this  $1,000,000  of  deposits  in  the  country  bank?  As  has  been 
stated,  the  amount  required  by  law  was  $150,000. 

The  country  bank  held  six  per  cent.,  or $60,000 

The  reserve  city  bank  held  twelve  and  one-half 

per  cent.,  or 11,250 

And  the  central  reserve  city  bank  held  twenty- 
five  per  cent.,  or 22,500 

Total    $93,750 

Instead,  therefore,  of  a  reserve  of  $150,000  being  held  against 
the  $1,000,000  of  deposits,  only  $93,750  was  actually  held,  or  a 
fraction  over  nine  per  cent,  instead  of  fifteen  per  cent.,  as  the  law 
required. 

There  is  still  another  feature  of  this  law  which  was  misleading 
in  its  operation  and  created  a  fiction  in  bookkeeping. 

The  original  $150,000  reserve  required  to  be  carried  by  the 
country  bank  against  the  million  dollars  of  deposits  was  shown 
on  the  books  and  in  the  reports  and  published  statements  of  the 
three  classes  of  banks  at  a  total  of  $180,000,  as  follows : 

The  country  bank  reported : 

Due   from   reserve   agent $90,000 

The  reserve  city  bank  reported: 

Due  to  country  bank $90,000 

Due  from  central  reserve  city  bank  90,000 
The  central  reserve  city  bank  reported : 

Due  to  reserve  city  bank 90,000 

Total    $180,000  $180,000 


52     ROMANCE  AND  TRAGEDY  OF  BANKING 

The  payment  of  interest  by  city  banks  on  balances  due  coun- 
try banks  in  excess  of  exchange  requirements  was,  therefore, 
not  the  only  incentive  to  the  concentration  of  bank  deposits  in 
the  city  banks. 

The  reports  of  condition  of  national  banks  for  August  22, 
1907,  the  date  of  the  last  call  previous  to  the  panic  of  1907, 
show  that  on  that  date  the  amount  due  to  banks  and  bankers 
from  national  banks  in  New  York  City  alone  aggregated  over 
$:t65,000,000  and  in  addition  thereto  over  $145,000,000  was  due 
country  banks,  which  had  been  placed  in  New  York  City  banks  to 
be  loaned  for  account  of  the  former. 

Some  authorities  and  writers  on  banking  and  currency 
strongly  advocated  the  concentration  of  funds  at  the  principal 
financial  center  of  the  country,  and  predicted  that  New  York  City 
would  eventually  become  the  financial  center  of  the  world,  but 
the  panic  of  1907,  and  other  financial  disturbances,  demonstrated 
in  a  very  practical  manner  the  evil  results  of  such  concentration 
under  the  then  existing  system  of  currency. 

No  commercial  bank  should  pay  interest  on  deposits  subject 
to  check  or  withdrawal  on  demand,  either  to  banks  or  individuals, 
but  competition  with  trust  companies  and  other  banking  institu- 
tions operating  under  State  authority  has  forced  national  bank- 
ing institutions  into  many  undertakings  not  authorized  or  con- 
templated by  the  National  Bank  Act  and  foreign  to  the  legitimate 
functions  of  commercial  banks. 

The  payment  of  liberal  and,  in  many  cases,  excessive  rates  of 
interest  by  trust  companies  and  State  banks  has  compelled  many 
competing  national  associations  operating  in  the  same  place  or 
locality  to  offer  like  inducements  for  deposits  and,  in  order  to 
find  profitable  employment  for  such  surplus  funds,  to  make  loans 
or  investments  of  a  more  or  less  hazardous  or  speculative 
character. 

The  policy  of  allowing  interest  on  deposits  subject  to  check 
Jind  payable  on  demand  is  foreign  to  the  spirit  of  sound  commer- 
cial banking  and  the  tendency  of  such  a  practice  is  not  to  materi- 
ally increase  the  earning  power  of  the  bank,  but  to  greatly  en- 
danger the  safety  of  the  funds  of  depositors. 


ROMANCE  AND  TRAGEDY  OF  BANKING  53 

National  Bank  Circulation  v.  Government  Issues 

Although  the  national  banking  system  had  been  in  operation 
less  than  five  years  when  Mr.  Hulburd  was  appointed  Comptrol- 
ler, it  appears  that  the  question  was  then  being  agitated  of  doing 
away  with  the  note-issuing  function  of  the  national  banks  and 
the  substitution  of  Government  issues  instead. 

It  was  claimed  in  behalf  of  this  proposed  change  that  by  the 
payment  of  interest  by  the  Government  on  the  bonds  deposited 
by  the  banks  as  security  for  circulation,  the  banks  were  receiving 
a  bonus  from  the  Government  for  issuing  the  currency,  and  by 
issuing  its  own  notes  the  Government  could  save  this  bonus, 
which  at  that  time  amounted  to  about  eighteen  millions  of  dollars 
per  annum. 

While  admitting  the  plausibility  and  popularity  of  this  con- 
tention, Mr.  Hulburd  proceeded  to  show  the  evils  that  would 
result  from  such  a  policy  and  the  inflation  of  currency  which  it 
would  produce. 

The  withdrawal  of  the  note-issuing  privilege  from  the  banks, 
he  said,  would  result  in  nine  out  of  every  ten  of  the  banks  wind- 
ing up  their  business,  not  because  the  privilege  was  considered 
absolutely  essential  to  the  business  of  banking,  but  because  the 
banks  would  not  submit  to  the  restrictions  imposed  upon  them 
by  the  banking  laws  without  the  compensatory  privilege  of  issu- 
ing circulation.  He  claimed  that  they  would  liquidate  and  re- 
organize under  State  authority,  or  do  business  as  private  bankers,, 
and  thus  rid  themselves  of  Federal  control  or  interference  with 
their  business. 

He  then  pointed  out  the  disastrous  effects  upon  the  business 
of  the  country  that  would  surely  follow  the  sudden  winding  up  of 
a  large  number  of  national  banks,  and  the  substitution  of  Gov- 
ernment issues  for  the  national  bank  currency.  The  government, 
he  said,  can  issue  its  own  notes  only  in  payment  of  its  debts,  and 
that  no  relation  existed  between  the  amount  that  might  be  re- 
quired and  issued  for  that  purpose,  and  the  amount  of  currency 
necessary  to  supply  the  demands  of  the  legitimate  business  needs 
of  the  countr3^  He  said  it  would  be  an  iron  currency,  without 
elasticity  and  with  no  relation  between  supply  and  demand. 


54     ROMANCE  AND  TRAGEDY  OF  BANKING 

He  then  discussed  in  detail  the  origin,  character  and  purpose 
of  the  legal-tender  issues  of  the  Government  as  disclosed  by  the 
debates  in  Congress  when  the  bill  to  provide  for  their  issue  was 
under  consideration.  He  quotes  Mr.  Spaulding,  who  introduced 
the  bill  in  January,  1862,  as  saying  that  he  offered  it  as  a  war 
measure,  a  measure  of  necessity,  and  not  of  choice,  to  meet  the 
most  pressing  demands  of  the  Treasury,  to  sustain  the  Army  and 
Navy  and  our  Government,  and  to  preserve  our  nationality. 

He  also  quoted  Senator  Fessenden,  of  Maine,  who  reported 
the  bill  from  the  Finance  Committee,  as  saying  that  the  com- 
mittee thought  in  giving  this  enlarged  power  to  the  Secretary 
of  the  Treasury,  the  country  should  be  assured  that  it  was  not 
to  be  resorted  to  as  a  policy,  but  that  it  really  was  what  it  pro- 
fessed to  be — only  a  temporary  measure  to  enable  the  Govern- 
ment to  meet  extraordinary  conditions. 

Senator  John  Sherman  was  quoted  as  saying  that  the  measure 
could  be  justified  only  upon  the  ground  of  necessity  and  that  if 
he  did  not  feel  that  the  necessity  existed  he  would  shield  himself 
behind  the  question  of  its  constitutionality  and  vote  against  it. 

Senator  Sumner,  of  Massachusetts,  supported  the  measure 
also  upon  the  grounds  of  urgent  necessity.  He  said  the  soldiers 
in  the  field  must  be  paid  and  fed.  This  admitted  of  no  failure  or 
postponement.  Whatever  may  be  the  national  resources,  they 
were  not  then  within  reach,  except  by  summary  process.  "Re- 
luctantly, therefore,  and  painfully,"  he  said,  "he  would  consent 
that  the  process  should  issue." 

The  bill  passed  February  5,  1862,  authorizing  the  issue  of 
legal-tender  notes  to  the  amount  of  $150,000,000.  On  July  11th 
following,  another  $150,000,000  was  authorized,  and  on  March  3, 
1863,  $150,000,000  more,  making  a  total  of  $450,000,000. 

In  discussing  the  bill  providing  for  the  last  issue,  Mr.  Spauld- 
ing said  that  he  was  averse  to  any  considerable  further  issue  of 
legal-tender  notes  and  would  consent  to  it  only  as  an  imperative 
necessity.  Too  large  an  issue,  he  said,  would  tend  to  inflate 
prices,  but  he  did  not  see  how  that  could  be  avoided.  He  could 
not  see  how  the  soldiers  were  to  be  paid  or  the  Government  car- 
ried on  otherwise. 


KOMANCE  AND  TRAGEDY  OF  BANKING      55 

In  February  and  July,  1862,  provision  was  made  for  the  con- 
version of  these  issues  into  five-twenty  bonds  whenever  the  holders 
should  present  them  at  the  United  States  Treasury  for  that  pur- 
pose, and  to  quiet  public  apprehension  as  to  any  further  issues, 
Mr.  Hulburd  stated  that  a  clause  was  inserted  in  the  Act  of 
June  30,  1864,  limiting  the  total  issues  to  $400,000,000,  and  such 
additional  amount,  not  exceeding  fifty  millions,  as  may  be  tem- 
porarily required. 

Mr.  Hulburd  declared  that  the  entire  theory  of  continuing 
and  augmenting  the  issue  of  United  States  notes  to  pay  the  debts 
of  the  Government  in  the  same  kind  of  paper  money  in  which 
they  were  contracted  was  an  after-thought  and  a  cunning  device, 
and  that  no  subject  had  been  more  obscured  by  crude  theories 
and  empirical  schemes  than  this  method  of  paying  the  public 
debt. 

Contrasting  this  form  of  circulation  with  the  paper  issues  of 
the  Government  during  the  period  of  the  Revolutionary  War, 
he  stated  that  the  Continental  Congress  issued  bills  which  were 
receivable  for  taxes.  The  thirteen  colonies  were  pledged  to  redeem 
these  bills  and  as  their  credit  began  to  fail.  Congress  declared 
that  whoever  should  refuse  to  receive  this  paper  as  gold  and  silver 
should  be  deemed  an  enemy  to  the  liberties  of  the  United  States. 
But  interest  was  stronger  than  patriotism,  and  as  the  amount 
increased,  its  value  went  rapidly  down  until,  at  last,  the  sum 
total  having  reached  two  hundred  and  fifty  millions,  it  became  so 
utterly  worthless,  about  the  year  1780,  that  it  ceased  to  circu- 
late. Austria,  Russia,  France  and  England  tried  the  same  ex- 
periment with  like  results,  and  Mr.  Hulburd  stated  that  there  is 
not  a  single  example  on  record  of  the  power  of  creating  money 
out  of  cheap  materials  having  been  exercised  by  a  sovereign  state 
for  any  length  of  time  or  through  any  season  of  public  difficulty, 
without  having  been  abused  by  over-issues.  The  experience  of 
this  country  during  the  last  years  of  the  Civil  War  and  immedi- 
ately following  its  close  was  but  a  repetition  of  the  experience 
of  other  countries  in  other  times. 

In  concluding  the  report  for  1867,  in  which  these  subjects 
were  discussed,  Mr.  Hulburd  said : 


56     ROMANCE  AND  TRAGEDY  OF  BANKING 

We  still  have  $3,000,000  of  gold  and  silver  in  the  coun- 
try waiting  to  be  called  into  active  service.  Give  these  millions 
their  place.  Make  room  for  them  by  calling  in  the  legal- 
tender  notes,  the  great  disturbing  element  of  our  currency, 
and  the  most  expensive  debt  the  government  has  inciirrd  — 
gradually  if  you  please,  but  surely.  Enforce  rigidly  the 
redemption  of  national  bank  notes.  Retain  for  the  federal 
government  supervision  and  control  of  the  currency  of  the 
country  through  the  national  banks,  and  we  may  yet  realize 
the  great  desideratum — a  safe,  uniform  currency,  convertible 
into  coin  at  the  will  of  the  holder. 


Banknote  Redemption  Agency 

In  his  report  for  1868,  Mr.  Hulburd  urged  upon  Congress 
the  establishment  of  an  agency  for  the  redemption  of  national 
bank  notes  at  the  principal  center  of  trade.  He  stated  that  while 
objection  was  made  to  the  location  of  such  an  agency  at  New 
York  City  on  the  ground  that  it  would  render  the  country  banks 
tributary  to  New  York,  he  did  not  believe  that  this  objection  was 
well  founded,  but  if  it  were  true,  it  could  be  readily  obviated  by 
authorizing  the  organization  of  a  national  bank  in  New  York 
City,  without  circulation  privileges  in  which  every  national  bank 
should  be  required  to  become  a  stockholder.  Such  bank  to  have 
a  capital  of  from  one  to  twenty  millions  and  be  made  the  redemp- 
tion agency  for  the  whole  country  and  the  clearing-house  for  all 
national  bank  circulation. 

It  was  suggested  that  this  bank  should  be  owned,  controlled 
and  managed  by  the  banks  themselves,  with  two  departments,  one 
for  banking  purposes,  and  the  other  for  the  redemption  and  ex- 
change of  national  bank  circulation.  The  latter  department  was 
expected  to  pay  all  the  expenses  of  redemptions  and  exchanges, 
and  in  addition  thereto,  yield  a  revenue  for  the  bank's  stock- 
holders. 

This  plan,  Mr.  Hulburd  contended,  would  not  only  insure  the 
prompt  and  certain  redemption  of  all  the  circulation,  but  Avould 
make  it  actually  convertible  at  all  times. 

Mr.  Hulburd  also  expressed  the  opinion  that  the  establish- 
ment of  such  a  bank  would  remedy  the  evils  resulting  from  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  57 

practice  of  payment  of  interest  on  country  bank  balances  by 
making  such  balances  immediately  available  for  reserve,  instead 
of  being  loaned  on  call  to  speculators  and  brokers. 

This  idea  of  a  central  redemption  agency  was  subsequently 
partly  carried  into  effect  by  the  creation  of  the  National  Bank 
Redemption  Agency  and  its  location  in  the  Treasury  Depart- 
ment in  Washington  as  a  division  of  the  United  States  Treas- 
urer's office. 


Instances  of  Theft  in  Connection  With  Currency  Shipments 

In  1864!  a  number  of  packages  of  notes  shipped  to  western 
banks  were  found  on  reaching  their  destination  to  be  short  of  the 
required  amount  by  one  sheet  in  each  package,  each  sheet  con- 
taining four  notes.  Similar  shortages  were  subsequently  discov- 
ered at  intervals  of  several  months.  For  a  period  of  nearly  a 
year  following  these  discoveries  no  additional  losses  were  re- 
ported. In  the  fall  of  1865,  sheets  of  money  began  to  be  missed 
from  the  packages  of  notes  in  the  vault  of  the  Bureau,  and  in 
December  of  that  year  a  package  containing  $4500  in  fifty  and 
one  hundred  dollar  notes  of  the  National  City  Bank  of  Lynn, 
Mass.,  was  missed.  These  thefts  ceased  again  until  about  May, 
1867,  when  a  package  containing  $12,000  in  fifty  and  one  hun- 
dred dollar  notes  of  the  First  National  Bank  of  Jersey  City, 
N.  J.,  disappeared. 

Investigation  was  made  at  the  time  each  of  these  thefts  oc- 
curred, and  efforts  were  made  to  discover  the  culprit,  but  without 
success,  until  the  last  package  was  taken.  The  theft  of  this  pack- 
age was  discovered  almost  immediately  after  its  disappearance, 
and  a  prompt  investigation  led  to  the  arrest  of  a  colored  messen- 
ger, who  was  employed  in  the  Issue  Division  of  the  Comptroller's 
office. 

It  appears  that  while  some  changes  were  being  made  in  the 
room  of  the  division,  this  messenger  was  sent  into  the  vault  with 
some  books  and  during  the  shoi-t  time  he  was  in  there  concealed  a 
money  package  under  his  vest.  He  had  been  previously  granted 
leave  of  absence  for  several  days,  and  after  stealing  the  package 
left  Washington  for  the  South,  where  he  put  some  of  the  notes  in 


58  ROMANCE  AND  TRAGEDY  OF  BANKING 

circulation  after  clumsiW  affixing  signatures  to  the  notes  other 
than  the  names  of  the  president  and  cashier  of  the  bank.  The 
arroTecate  of  the  notes  stolen  amounted  to  $17,560.  The  messen- 
ger  was  arrested  and  indicted,  but  escaped  conviction  on  legal 
technicalities.  It  was  shown  at  the  trial  of  the  case  that  other 
employees  of  the  Comptroller's  office  had  access  to  the  vault  in 
which  the  money  was  stored,  and  the  evidence  offered  was  not  con- 
sidered sufficient  to  fasten  the  theft  upon  him.  A  motion  was  also 
made  to  quash  the  indictment  on  the  ground  that  it  recited  that 
money  had  been  stolen,  when  as  a  matter  of  fact,  incomplete  na- 
tional bank  notes,  it  was  contended,  are  not  strictly  money  until 
signed  by  the  officers  of  the  issuing  bank. 

The  Act  of  July  28,  1892,  settled  this  contention  by  provid- 
ing for  the  redemption  of  all  lost  or  stolen  notes,  or  notes  put  in 
circulation  without  signatures  or  upon  the  forged  signatures  of 
the  officers  of  the  bank. 

It  is  believed  that  this  messenger  was  responsible  for  all  the 
thefts  reported,  as  no  further  shortages  occurred  after  his  dis- 
missal from  the  office. 

Occasionally  sheets  of  notes  were  misplaced  or  small  discrep- 
ancies were  found  by  counters  of  worn-out  or  mutilated  notes  sent 
in  for  redemption,  but  these  shortages  were  generally  accounted 
for. 

About  the  time  these  money  shortages  were  being  discovered, 
a  package  of  vault  currency  was  missed  at  the  close  of  the  day's 
business,  which  gave  the  clerks  of  the  Issue  Division  several  hours 
of  anxiety  and  trouble.  The  entire  force  of  the  Division  was  de- 
tained as  late  as  ten  o'clock  at  night  while  search  was  being  made 
for  the  missing  package.  A  young  man,  an  employee  of  the  Di- 
vision, had  an  important  social  engagement  for  that  evening 
which  he  was  prevented  from  keeping  because  of  his  detention  at 
the  office  and  he  naturally  became  considerably  exasperated.  After 
the  vault  had  been  thoroughly  searched  for  the  missing  package, 
without  results,  this  young  man  in  temper  gave  one  of  the  desk 
chairs  which  was  in  his  way,  a  kick,  upsetting  it,  and  the  lost 
money  package  fell  off  the  chair  on  the  floor.  Upon  inquiry  as 
to  how  the  package  came  there  it  was  learned  that  an  absent- 
minded  money  counter  had  used  the  package  during  the  day  as  a 


ROMANCE  AND  TRAGEDY  OF  BANKING  59 

cushion,  her  chair  being  too  low  for  her  desk,  and  had  covered  it 
over  with  some  brown  wrapping  paper  which  concealed  it  from 
view,  and  had  forgotten  placing  it  on  the  chair. 

The  comments  of  the  clerks  who  had  been  detained  so  late  in 
the  search  for  the  package,  especially  those  of  the  young  man 
who  was  compelled  to  break  his  social  engagement,  may  be  better 
imagined  than  described. 


Great  Chicago  Fire  of  1871 

The  great  Chicago  fire  in  1871  occurred  during  the  closing 
year  of  Mr.  Hulburd's  administration.  The  buildings  in  which 
seventeen  of  the  eighteen  national  banks  in  that  city  were  located 
were  totally  destroyed.  The  loss  on  the  buildings  and  the  furni- 
ture and  fixtures  of  the  banks  was  estimated  at  about  $176,000, 
and  on  discounted  paper  at  about  $600,000. 

The  bills  receivable  held  by  the  banks  at  that  time  amounted 
to  over  $21,000,000,  and  their  liabilities  to  correspondent  banks 
and  depositors  to  over  $26,000,000.  The  contents  of  the  vaults, 
however,  when  opened,  were  found  to  be  in  a  good  condition,  and 
notwithstanding  the  great  destruction  of  property  the  banks  re- 
sumed business  in  eight  days  after  the  conflagration,  in  tempo- 
rary quarters  which  they  secured  in  dwellings  remote  from  their 
former  locations.  At  the  close  of  the  first  day's  business  the  de- 
posits of  customers  and  correspondent  banks  exceeded  the  dis- 
bursements, instead  of  balances  being  largely  withdrawn  as  was 
anticipated. 

A  glowing  tribute  was  paid  Mr.  Hulburd  by  his  successor  in 
his  first  annual  report  to  Congress,  for  the  skillful  manner  in 
which  he  handled  the  Chicago  situation  at  that  time,  and  the  valu- 
able service  he  rendered  in  bringing  about  so  early  a  resumption 
of  business. 


Bank  Failures  During  Hulburd's  Administration 

In  the  report  of  Comptroller  Hulburd  for  1866,  three  banks 
are  listed  as  having  been  placed  in  the  hands  of  receivers  during 
the  three  years  of  existence  of  the  national  banking  system.    The 


60     ROMANCE  AND  TRAGEDY  OF  BANKING 

cause  assigned  for  the  appointment  of  receivers  for  these  banks 
was  failure  to  redeem  their  circulating  notes  on  demand. 

As  no  holder  of  a  national  bank  note  ever  lost,  or  could  lose  a 
dollar  by  reason  of  the  failure  of  the  issuing  bank  to  redeem  its 
circulation,  the  notes  being  absolutely  secured  by  a  deposit  of 
United  States  bonds  in  the  Treasury  of  the  United  States,  re- 
deemable at  par  by  the  Government,  it  would  seem  unreasonable 
and  unnecessary  to  close  a  bank  because  of  failure  to  redeem  its 
circulating  notes  when  presented  at  the  bank  for  that  purpose. 

In  the  table  of  failures,  which  appears  in  the  reports  of  the 
Comptroller  for  subsequent  3'ears,  containing  a  list  of  receivers 
appointed  for  insolvent  banks  from  the  beginning  of  the  national 
S3'stem,  a  different  cause  than  the  failure  to  redeem  circulation  is 
assigned  for  the  closing  of  the  three  banks  above  referred  to. 
"Injudicious  banking  and  failure  of  large  debtors,"  are  the  rea- 
sons given  in  one  case,  and  "injudicious  banlcing"  in  the  other  two. 

In  explanation  of  these  apparent  discrepancies,  it  appears 
that  in  the  early  years  of  the  system  when  a  bank  became  insol- 
vent, or  subject  to  a  receivership  for  some  other  cause,  it  was  the 
practice  to  obtain  and  present  for  redemption  at  the  bank's  coun- 
ter one  of  its  circulating  notes.  By  agreement  between  the  bank 
and  a  representative  of  the  Comptroller's  office,  the  bank  would 
refuse  to  redeem  the  note  and  the  note  would  then  be  protested, 
thus  affording  a  statutory  ground  for  the  appointment  of  a 
receiver. 

This  was  a  friendly  kind  of  a  proceeding  and  brought  the 
Comptroller  well  within  his  statutory  right  to  close  and  take  pos- 
session of  the  association,  as  the  law  specifically  provides  for  the 
appointment  of  a  receiver  upon  failure  of  a  bank  to  redeem  its 
circulation  on  demand. 

Comptrollers  in  those  days  were  scrupulously  conservative  in 
the  exercise  of  the  supervisory  powers  conferred  upon  them  by 
law,  and  in  order  to  avoid  any  question  of  their  right  to  close  and 
take  possession  of  an  association  resorted  to  the  procedure 
described. 

They  recognized  the  fact  that  the  same  laws  that  govern  the 
national  banks  and  define  their  corporate  powers  prescribe  also 
the  duties  and  powers  of  the  Comptroller  of  the  Currency  and 


KOMANCE  AND  TRAGEDY  OF  BANKING  61 

limit  his  authority,  and  that  the  Comptroller  has  no  more  right 
to  disregard  the  law  by  transcending  his  powers  or  neglecting 
to  perform  his  duties  than  the  banks  have  to  exceed  their  corpo- 
rate powers  or  to  violate  the  restrictive  provisions  of  the  statutes 
under  which  they  were  organized  and  operate,  and  from  which 
they  derive  their  powers. 

As  a  rule,  such  of  the  mistakes  as  Comptrollers  of  earlier 
years  are  alleged  to  have  made,  and  for  which  they  have  been 
severely  censured  and  criticised  in  the  public  prints  from  time  to 
time,  whether  justly  so  or  not,  were  not  attributable  to  a  too 
rigid  enforcement  of  the  banking  laws,  or  an  arbitrary  assump- 
tion of  powers  not  conferred  upon  them  by  the  statutes,  but 
rather  as  the  result  of  undue  leniency  extended  to  refractory  asso- 
ciations in  permitting  them  to  engage  in  questionable  or  unlawful 
practices  and  undertakings  not  authorized  or  contemplated  by 
the  National  Bank  Act,  and  to  temporizing  with  unsatisfactory 
or  dangerous  conditions  which  called  for  prompt  and  decisive  cor- 
rective measures  in  order  to  avert  inevitable  losses  that  would  im- 
peril the  safety  of  the  association  or  reduce  it  to  a  condition  of 
insolvency.  Comptrollers,  as  a  rule,  have  been  ultra-conservative 
in  their  dealings  with  the  banks,  and  the  mistakes  that  they  have 
made  in  the  administration  of  the  banking  laws  have  been  mostly 
those  of  omission  rather  than  of  commission. 

There  were  sixteen  national  bank  failures  during  Mr.  Hul- 
burd's  term  of  service.  The  largest  of  these  was  the  Ocean  Na- 
tional Bank  of  New  York  City,  which  was  placed  in  the  hands  of 
a  receiver  December  13,  1871. 

The  capital  stock  of  this  association  was  $1,000,000,  divided 
into  shares  of  the  par  value  of  fifty  dollars,  and  its  total  liabilities 
about  $3,250,000.  An  assessment  of  forty  per  cent,  was  levied 
upon  the  stock,  of  which  amount  $348,961  was  collected.  The 
creditors  were  paid  one  hundred  per  cent,  of  their  claims  with 
interest  from  the  date  of  closing,  and  the  trust  was  finally  closed 
April  20,  1892. 

Theodore  M.  Davis  was  appointed  receiver  of  this  bank  by 
Mr.  Hulburd.  In  1875,  charges  were  preferred  against  the  re- 
ceiver and  others  in  connection  with  the  administration  of  the 
trust.     The  receiver  was  charged  with  having  disposed  of  some 


62     ROMANCE  AND  TRAGEDY  OF  BANKING 

of  the  securities  of  the  bank  at  less  than  their  actual  or  market 
value  and  as  having  been  personally  interested  in  the  purchase  of 
these  securities. 

Under  authority  of  a  resolution  adopted  by  the  House  of 
Representatives  in  1874,  Forty-third  Congress,  the  Committee  on 
Banking  and  Currency  made  an  exhaustive  investigation  of  these 
charges  and  submitted  a  voluminous  report  of  the  testimony  taken 
and  of  the  conclusions  based  thereon.  The  investigation  covered 
the  period  from  December  12,  1871,  the  date  of  failure  of  the 
bank,  to  October  31,  1873,  the  date  of  the  last  general  statement 
made  by  the  receiver. 

It  appears  that  Mr.  Davis,  the  receiver,  was  charged  with 
entering  into  a  combination  or  conspiracy  with  James  A.  Ayer 
and  Isaac  H.  Knox,  of  the  firm  of  Boorman,  Johnston  &  Com- 
pany, to  defraud  debtors  of  the  bank  who  had  deposited  certain 
bonds  and  stocks,  known  as  the  first,  second  and  third  mortgage 
bonds  of  the  Portage  and  Lake  Superior  Ship  Canal  Company,  a 
corporation  chartered  by  the  State  of  Michigan,  for  the  purpose 
of  constructing  a  canal  to  connect  the  waters  of  Lake  Superior 
with  Portage  Lake.  These  stocks  and  bonds  were  held  by  the 
bank  as  collateral  for  loans  amounting  to  about  $561,000. 

It  was  alleged  that  the  receiver  disposed  of  a  large  amount  of 
these  securities  at  auction,  at  ruinous  rates,  to  Isaac  H.  Knox, 
an  alleged  confederate  of  the  receiver,  and  that  through  a  con- 
spiracy, the  lands  and  property  of  the  company  upon  which  these 
securities  were  issued,  were  about  to  pass  into  the  hands  of  a  com- 
bination in  which  the  receiver  was  interested,  the  debtors  claim- 
ing that  the  lands  and  property  were  worth  millions  more  than 
the  indebtedness  of  the  company  to  the  bank. 

The  evidence  taken  by  the  committee  shows  that  the  company 
was  insolvent  and  could  not  pay  its  indebtedness  to  the  bank  and 
others,  and  that  unless  the  securities  held  could  in  some  way  be 
made  valuable  the  bank  would  lose  the  whole  amount  of  the  loan 
of  .$561,000.  It  appeared  further  that  this  could  be  done  only 
by  the  completion  of  the  canal,  which  would  require  a  large  addi- 
tional loan.  The  company  claimed  that  a  loan  had  been  nego- 
tiated, the  amount  of  which  would  have  been  sufficient  to  pay  the 
indebtedness  to  the  bank  in  full,  but  the  receiver  and  those  who 


ROMANCE  AND  TRAGEDY  OF  BANKING  63 

were  operating  with  him  defeated  the  negotiations  and  prevented 
the  representatives  of  the  company  from  obtaining  the  money.  It 
was  claimed  that  the  loan  was  negotiated  through  some  English 
parties  and  that  it  was  based  upon  the  security  of  rich  mineral 
lands  which  constituted  part  of  the  400,000  acres  granted  to  the 
State  of  Michigan  by  the  General  Government. 

The  receiver  denied  that  he  or  any  person  authorized  by  him 
in  any  manner  interfered  with  any  negotiations  that  the  com- 
pany, or  anyone  acting  for  the  company,  were  making  for  a  loan 
on  these  lands,  and  the  committee  reported  that  the  testimony 
failed  to  support  the  allegations  made  against  the  receiver  in  this 
respect. 

Another  complication,  however,  was  disclosed  by  the  evidence. 
The  debts  of  the  company  due  the  bank,  which  were  secured  by 
the  collateral  in  question,  were  all  subject  to  the  plea  of  usury, 
and  by  the  laws  of  New  York  such  a  defense  would  defeat  not 
only  the  collection  of  the  interest,  but  also  the  principal  of  the 
debt. 

The  committee  reported  that  the  company  was  willing  to 
waive  the  plea  of  usury,  if  time  were  given  it  to  negotiate  a  loan 
with  which  to  pay  its  debt  to  the  bank,  but  if  time  were  not  given 
and  the  company  were  pressed  for  payment,  usury  would  be 
pleaded.  The  receiver  had  no  confidence  in  the  company's  ability 
to  negotiate  the  loan,  and  he  therefore  formed  a  syndicate  to  pur- 
chase the  securities  in  order  to  insure  the  payment  of  the  debt  to 
the  bank.  This  syndicate  was  composed  of  Dr.  James  C.  Ayer, 
Isaac  H.  Knox  and  himself.  Ayer  and  Knox  were  large  creditors 
of  the  canal  company.  The  object  of  this  syndicate  was  to  raise 
money  with  which  to  complete  the  canal  and  other  works  as  well, 
and  pay  the  debts  due  to  themselves  and  to  the  bank. 

The  terms  of  the  syndicate  were  submitted  by  the  receiver  to 
his  counsel,  who  expressed  the  opinion  that  the  contract  was  valid 
and  binding  and  believed  to  be  for  the  best  interests  of  the  bank, 
its  creditors  and  stockholders. 

In  furtherance  of  the  syndicate  plan  and  to  defeat  the  plea 
of  usury,  the  receiver  commenced  an  action  against  the  largest 
debtor  of  the  bank,  who  also  was  one  of  the  largest  stockholders 
in  the  canal  company,  and  forced  him  into  bankruptcy.    He  then 


64  ROIVIANCE  AND  TRAGEDY  OF  BANKING 

applied  for  and  received  an  order  from  the  court  to  sell  certain 
of  the  securities  in  question  which  were  held  by  the  bank.  The 
evidence  showed  that  the  securities  were  regularly  advertised  for 
sale  and  sold  to  the  highest  bidder,  in  open  market,  when  some  of 
the  owners  of  the  canal  were  present  and  protested  against  the 
sale,  and  that  Isaac  H.  Knox,  without  any  collusion  with  the  re- 
ceiver, purchased  $268,000  of  the  second  mortgage  bonds  at  an 
average  price  of  twenty-seven  cents.  Sales  of  the  same  kind  of 
bonds  were  made  by  other  parties  during  October,  November  and 
December,  1872,  and  in  July  and  December,  1873,  in  New  York 
City,  at  an  average  price  of  only  a  fraction  over  twenty  cents. 

The  committee  reported  that  all  these  sales,  so  far  as  the  testi- 
mony enabled  them  to  judge,  were  fair  and  in  accordance  with 
general  usage. 

The  evidence  showed  further  that  through  the  efforts  of  the 
receiver,  the  canal  work  had  all  been  completed,  and  to  do  this  it 
required  the  expenditure  of  from  four  to  five  hundred  thousand 
dollars,  all  of  which  sum  was  raised  by  Mr.  Knox  and  Mr.  Ayer. 

Following  the  completion  of  the  canal,  proceedings  were  com- 
menced and  a  decree  obtained  from  the  Circuit  Court  of  the 
United  States  for  the  State  of  Michigan  for  the  sale  of  all  the 
lands  of  the  canal  company,  the  proceeds  of  which  were  to  be  ap- 
plied to  the  payment  of  the  company's  debts. 

Messrs.  Ayer  and  Knox  declared  most  positively  that  the  re- 
ceiver was  not  in  any  way  interested  in  the  syndicate  except  as 
receiver  and  for  the  benefit  of  the  bank. 

In  concluding  their  report,  the  committee  expressed  the 
opinion  that  the  receiver  was  not  censurable  for  the  course  he 
liad  pursued,  but,  on  the  contrary,  he  apparently  acted  in  good 
faith  and  did  what  he  considered  to  be  for  the  best  interests  of 
the  creditors  and  stockholders  of  the  bank. 

During  the  second  session  of  the  Forty-sixth  Congress,  this 
whole  matter  was  the  subject  of  further  investigation  by  the 
Banking  and  Currency  Committee  of  the  House  of  Representa- 
tives, under  authority  of  a  resolution  adopted  June  4,  1879,  and 
the  report  submitted  by  Mr.  Buckner  of  the  committee,  under 
date  of  May  19,  1880,  contains  a  most  scathing  denunciation  of 
the  receiver's  course  in  connection  with  the  canal  company. 


ROMANCE  AND  TRAGEDY  OF  BANKING  65 

The  report  reviews  at  length  the  testimony  taken  by  the  com- 
mittee of  the  Forty-third  Congress,  but  reaches  a  wholly  differ- 
ent conclusion. 

The  report  condemns  the  action  of  the  receiver  in  depreciat- 
ing the  value  of  the  canal  company  bonds  previous  to  their  sale 
to  the  syndicate  by  publicly  proclaiming  that  they  were  without 
value  and  that  the  debt  to  the  bank  was  wholly  unsecured. 

These  bonds,  it  was  claimed,  had  been  selling  from  fifty  to 
seventy-five  cents  up  to  that  time,  and  the  opinion  publicly  ex- 
pressed by  the  receiver  that  the  land  grant  would  fail  and  thereby 
make  the  security  invalid,  necessarily  depressed  the  price  of  the 
bonds  and  militated  against  the  interests  he  was  bound  to  protect 
and  advance.  Such  conduct,  the  committee  said,  could  not  be 
justified  by  any  theory  creditable  to  his  sagacity  or  his  fidelity, 
and  that  it  was  his  duty  to  have  observed  silence  and  to  have  dis- 
posed of  the  bonds  as  rapidly  and  advantageously  as  possible 
under  authority  of  the  court. 

It  was  the  opinion  of  the  committee  that  this  departure  from 
a  faithful  discharge  of  his  duties  to  the  creditors  and  owners  of 
the  bank  was  the  inception  of  a  plan  well  matured  and  skillfully 
executed  by  which  the  receiver  would  ultimately  obtain  the  con- 
trol and  ownership  of  the  property  and  franchise  of  the  canal 
company  for  himself  and  his  friends. 

The  exact  terms  of  the  syndicate  agreement,  it  was  stated, 
were  not  made  known  to  the  committee  which  first  investigated 
this  matter  in  1874,  having  been  excluded  upon  the  ground  that 
it  might  affect  the  litigation  pending  at  that  time. 

At  the  time  of  the  second  investigation,  in  1880,  this  litiga- 
tion had  been  concluded.  The  canal  company  had  been  placed  in 
bankruptcy,  its  property  had  been  sold,  and  a  new  company  had 
been  formed  with  Mr.  Davis,  the  receiver  of  the  bank,  as  its  presi- 
dent. This  compan}^  was  then  the  owner  of  the  property  and  in 
possession  of  it. 

The  committee  then  took  up  the  question  of  the  authority  of 
the  receiver  to  make  the  stockholders  and  depositors  of  the  un- 
fortunate bank  a  party  to  an  agreement  to,  as  the  report  ex- 
pressed it,  "wreck  the  canal  company."     Section  5234,  of  the 
Revised  Statutes  of  the  United  States,  was  quoted  as  containing 


66     ROMANCE  AND  TRAGEDY  OF  BANKING 

the  full  measure  of  the  powers  and  duties  of  the  receiver  of  a 
national  bank.  This  section  provides  that  the  receiver  "shall, 
under  the  direction  of  the  Comptroller,  take  possession  of  the 
books,  records  and  assets  of  every  description,  of  such  associa- 
tion, collect  all  debts,  dues,  and  claims  belonging  to  it,  and  upon 
the  Older  of  any  court  of  competent  jurisdiction,  may  sell  or 
compound  all  bad  or  doubtful  debts,  and  on  a  like  order  may  sell 
all  the  real  and  personal  property  of  such  association  on  such 
terms  as  the  court  may  direct,"  etc. 

It  was  contended  by  the  committee  that  the  receiver's  plain 
and  only  duty  and  authority  under  the  section  of  the  law  quoted 
was  to  have  applied  to  the  court  for  an  order  to  compound  or 
sell  the  debts  of  the  canal  company  to  his  trust,  but  that  no  such 
application  was  made  to  the  court  and  no  order  to  compound  or 
sell  was  obtained.  The  testimony  before  the  committee  showed, 
according  to  the  report,  that  the  receiver  applied  for  an  order 
to  compound  a  particular  debt  due  the  bank,  which  was  granted, 
but  the  only  evidence  that  he  acted  under  authority  of  the  court 
in  making  the  syndicate  contract  and  in  using  the  assets  of  the 
bank  in  this  illegal  arrangement  was  in  the  proceedings  of  the 
bank  against  one  Alfred  Wild,  a  debtor  of  the  bank,  to  put  him 
in  bankruptcy,  in  which  Wild  had  obtained  an  injunction  to  stay 
the  sale  of  some  of  the  canal  bonds  pledged  for  the  payment  of 
his  debt  to  the  bank. 

The  receiver  was  charged  by  the  committee  with  gross  per- 
version of  the  facts  in  attempting  to  justify  his  illegal  action  by 
the  approval  of  the  court  in  a  proceeding  in  which  his  syndicate 
plan  was  not  adjudicated  or  passed  upon  by  the  court. 

The  report  of  the  committee  on  the  previous  investigation  of 
this  matter,  it  was  stated,  did  not  approve  the  receiver's  course, 
but  attempted  to  justify  it  on  the  ground  "that  he  had  seen  fit 
in  his  own  way  to  save  the  debt,  which,  in  the  end,  would  pay  all 
d('y)ositors  and  leave  a  surplus  to  be  divided  among  the  stock- 
holders." In  other  words,  the  committee  said,  it  was  a  case  of 
the  end  justifying  the  means,  although  the  means  resorted  to 
were  unauthorized  and  contrary  to  law. 

The  receiver,  the  committee  stated,  also  fortified  himself 
behind  the  fact  that  two  Secretaries  of  the  Treasury  and  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  67 

Comptroller  of  the  Currency  had  approved  his  syndicate  plan, 
but  the  committee  denied  that  these  officials  had  any  authority  as 
executive  officers  of  the  Government  to  confer  upon  the  receiver 
any  power  to  do  that  which  the  law  had  vested  in  tlie  judicial 
departments. 

The  committee  expressed  the  opinion  that  if  the  receiver  had 
obeyed  the  law  and  had  not  subordinated  the  interests  of  the 
bank  to  his  own  purposes,  quite  as  much  or  more  might  have  been 
realized  on  the  bad  and  doubtful  debts  due  the  bank,  much  less 
interest  would  have  accumulated  against  the  bank,  and  the  stock- 
holders would  have  escaped  with  little  or  no  assessment  to  make 
good  the  deficiency  in  assets  to  meet  liabilities  to  creditors. 

The  committee  concludes  its  report  as  follows: 

There  is  no  leading  fact  in  evidence  before  the  com- 
mittee that  is  not  consistent  with  this  theory  of  his  conduct 
as  receiver.  And  back  and  behind  all  this  is  the  indisputable 
fact  that  to  accomplish  his  ends,  he  found  it  necessary  to 
disregard  the  plain  and  reasonable  provisions  of  law  enacted 
for  his  guidance,  and  to  throw  the  responsibility  of  his  acts 
upon  officers  who  had  no  more  power  than  he  to  disobey  or 
to   recommend  disobedience  to  its   positive  injunctions. 

The  officer  who  violates  the  commands  of  the  law,  enacted 
to  direct  or  control  him  and  to  protect  the  rights  of  others, 
cannot  complain  that  all  reasonable  and  fair  presumptions 
are  made  against  his  official  acts.  If  he  undertakes  to  dis- 
charge the  duties  imposed  upon  him  by  law  in  his  own  way 
and  not  in  the  waj'^  pointed  out  by  that  law,  he  assumes 
responsibilities  that  are  not  to  be  evaded,  although  the 
motives  of  his  action  may  appear  to  have  been  far  more 
creditable  than  those  which  seem  to  have  controlled  the 
receiver  of  the  Ocean   National   Bank. 

The  committee  declared  that  but  for  the  fact  that  the  re- 
ceivership was  so  near  its  final  closing,  a  resolution  would  have 
been  reported  to  the  House  recommending  the  receiver's  removal 
from  office,  and  expressed  the  opinion  that  the  assessed  stock- 
holders, or  any  of  them,  could,  without  additional  legislation, 
prosecute  an  action  against  the  receiver  to  recover  from  any  of 
the  assets  of  the  bank  remaining  in  his  hands  the  amount  of  the 


68  ROMANCE  AND  TRAGEDY  OF  BANKING 

assessment  which  they  were  forced  to  pay,  or  to  institute  a  suit 
on  his  official  bond  for  a  breach  of  its  conditions. 

This  report  was  signed  by  Hon.  A.  H.  Buckner  and  seven 
other  members  of  the  Committee  on  Banking  and  Currency. 

Hon.  W.  W.  Crapo  and  Hon.  S.  B.  Chittenden,  members  of 
the  committee,  also  signed  it,  but  with  the  following  qualifi- 
cations: 

We  concur  in  the  above  report^  so  far  as  it  condemns 
the  departure  from  the  directions  given  in  the  national 
banking  law  to  receivers  in  the  liquidation  of  the  assets  of 
national  banks.  It  was  the  duty  of  the  receiver  of  the 
Ocean  National  Bank  to  comply  strictly  with  the  tenns  of 
the  statute  in  the  disposition  of  the  assets  placed  in  his 
hands.  Instead  of  doing  so,  he  exercised  a  discretion  which, 
even  if  well  intended,  was  unwise  and  in  violation  of  law. 


The  conclusions  expressed  by  the  majority  and  minority  mem- 
bers of  this  committee  as  to  the  powers  and  duties  of  a  receiver 
•of  a  national  bank  are  absolutely  sound,  and  it  would  be  well  for 
every  receiver  of  such  a  bank  to  follow  strictly  this  wholesome 
admonition. 

And  this  advice  applies  with  equal,  if  not  greater  force,  to 
Comptrollers  of  the  Currency.  The  acts  of  the  receiver  are  sub- 
ject to  the  approval  of  the  Comptroller  and  all  failed  banks  are 
liquidated  under  his  general  directions.  If  the  receiver  and  the 
Comptroller  adhere  strictly  to  the  law  in  the  liquidation  of  the 
affairs  of  insolvent  banks,  even  then  their  acts  will  be  sometimes, 
and  frequently  have  been,  subject  to  the  criticisms  of  those  whose 
interests  are  or  have  been  affected  thereby.  But  when  they  dis- 
regard the  well-defined  rules  prescribed  by  the  statute  for  the 
liquidation  of  a  trust,  they  assume  a  responsibility  for  which 
they  are  individually  liable  under  their  bonds. 

The  conditions  complained  of  and  condemned  by  the  Banking 
and  Currency  Committee  in  1880  have  not  been  without  their 
parallel  in  later  years,  as  far  as  they  relate  to  methods  pursued 
in  the  liquidation  of  receiverships  and  the  handling  of  insolvent 
banks  contrary  to  the  manner  prescribed  by  law,  and  some  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  69 

these  methods  would  not  stand  the  test  of  the  courts  or  Congres- 
sional investigation. 

In  dealing  with  the  property  rights  of  others  in  the  liquida- 
tion of  failed  banks  the  closer  the  Comptroller  of  the  Currency 
adheres  to  the  plain  letter  and  spirit  of  the  national  banking 
laws,  and  requires  his  subordinates  to  do  likewise,  the  less  liable 
he  will  be  to  mistakes,  criticism  and  responsibility  for  the  results, 
even  though  such  results  may  not  be  as  satisfactory  as  those 
which,  in  his  judgment,  might  have  been  reached  through  some 
other  course  or  procedure  which,  if  successful,  would  not  ma- 
terially benefit  the  creditors  of  the  failed  bank,  but  if  unsuccess- 
ful would  subject  him  to  censure.  The  Comptroller  of  the  Cur- 
rency is  no  more  justified  in  embarking  in  experimental  methods 
in  the  liquidation  of  an  insolvent  national  bank,  because  of  the 
possibility  of  attaining  better  pecuniary  results  by  pursuing  a 
course  other  than  that  prescribed  by  law,  than  the  banker  was 
in  the  first  instance  in  making  the  unlawful  and  speculative  ven- 
tures in  anticipation  of  greater  possible  profits  which  involved 
the  bank  in  the  losses  which  made  the  receivership  necessary. 

The  worst  feature  of  this  kind  of  administration  is  the  danger- 
ous precedent  and  bad  example  it  sets  for  the  younger  officials  of 
the  Government  service,  who  are  trained  in  an  atmosphere  im- 
pregnated with  a  disregard  of  legal  restrictions,  and  are  taught 
to  believe  that  administrative  policy  and  business  expediency  are 
superior  to  law  and  order  and  that  the  end  sought  to  be  accom- 
plished justifies  the  means. 

In  no  Bureau  of  the  several  executive  departments  did  this 
policy  prevail  to  so  great  an  extent  as  in  the  Currency  Bureau 
during  the  administration  of  President  Taft,  but  without  his 
knowledge  and  contrary  to  his  emphatically  expressed  public 
utterances  on  the  subject. 

Amendments  to  the  Laws  Enacted 

During  Mr.  Hulburd's  administration,  the  law  was  amended 
to  provide  a  penalty  for  imitating  national  bank  circulation ;  for 
the  refunding  of  excessive  tax  on  circulation;  restricting  State 
taxation  of  shares  of  national  bank  stock;  prohibiting  loans  on 


70  ROIVIANCE  AND  TRAGEDY  OF  BANKING 

the  credit  of  United  States  or  national  bank  notes  and  the  with- 
holding of  such  notes  from  circulation;  requiring  reports  of  con- 
dition and  of  earnings  and  dividends  to  be  made  to  the  Comp- 
troller; prescribing  a  penalty  for  false  certification  of  checks; 
and  for  embezzlement,  abstraction,  misapplication,  etc.,  of  any 
moneys,  funds  or  credits  of  a  bank ;  making  false  entries  in  the 
books  of  the  association,  in  reports  to  the  Comptroller,  etc. ;  for 
the  retirement  of  circulation  by  liquidating  banks ;  and  providing 
for  the  organization  of  banks  to  issue  gold  notes. 

This  latter  Act  provided  that  upon  the  deposit  of  any  United 
States  bonds,  bearing  interest  payable  in  gold,  with  the  Treasurer 
of  the  United  States,  in  the  manner  prescribed  by  the  national 
bank  act,  the  Comptroller  of  the  Currency  was  authorized  to 
issue  to  such  associations  circulating  notes  to  an  amount  not 
exceeding  eighty  per  centum  of  the  par  value  of  the  bonds  depos- 
ited, redeemable  upon  presentation  in  gold  coin  of  the  United 
States,  and  the  banks  issuing  such  notes  were  required  to  carry 
a  reserve  against  them  of  not  less  than  twenty-five  per  centum 
of  the  circulation  outstanding,  in  gold  or  silver  coin  of  the  United 
States. 

There  were  ten  associations  organized  under  this  Act,  nine 
of  which  were  located  in  California,  and  one  at  Boston,  Mass. 

The  Act  of  February  14,  1880,  authorized  the  conversion  of 
all  such  banks  into  regular  currency  associations.  Seven  of  these 
banks  reorganized  as  currency  associations  and  three  went  into 
voluntary  liquidation,  the  last  one  in  February,  1880,  since  which 
date  there  has  been  no  national  gold  bank. 


»*»-l 


JOHN  JAY  KNOX 
Comptroller  of  the  Currency,  1872- 1884 


CHAPTER  VI 

John  Jay  Knox 

JOHN  JAY  KNOX,  the  fourth  Comptroller  of  the  Currency, 
was  appointed  April  25,  1872,  to  succeed  Mr.  Hulburd,  and 
served  until  April  30,  1884-. 

He  was  born  at  Knoxboro,  Oneida  County,  New  York,  in 
March,  1828,  and  graduated  from  Hamilton  College,  New  York, 
in  1849.  After  graduation,  he  entered  the  Bank  of  Vernon,  New 
York,  of  which  his  father  was  president  for  over  twenty  years, 
and  later  assisted  in  the  organization  of  banks  at  Syracuse  and 
Binghamton,  N.  Y.,  under  the  free  banking  law  of  New  York 
State.  Subsequently,  he  went  to  Minnesota  and  started  a  pri- 
vate bank  at  St.  Paul  with  his  brother,  who  afterward  was  Public 
Examiner  for  the  State  of  Minnesota. 

At  the  outbreak  of  the  Civil  War,  he  wrote  an  article  advo- 
cating the  passage  of  a  national  banking  law,  which  was  pub- 
lished in  Hunt's  Merchants'  Magazine.  This  article  attracted 
the  attention  of  Secretary  Chase  and  others,  and  when  Mr.  Knox 
visited  Washington  after  the  passage  of  the  National  Bank  Act 
he  called  upon  Secretary  Chase,  who  introduced  him  to  Mr.  Mc- 
Culloch,  which  led  to  his  appointment  as  a  clerk  in  the  office  of 
the  Treasurer  of  the  United  States.  Shortly  afterward  he  was 
transferred  to  the  Secretary's  office  as  a  disbursing  clerk.  He 
resigned  after  about  three  years'  service  to  accept  the  position 
of  cashier  of  the  Exchange  National  Bank  of  Norfolk,  Va.  He 
did  not  retain  this  position  very  long,  but  re-entered  the  service 
of  the  Treasury  Department  as  a  clerk  and  was  shortly  there- 
after detailed  by  Secretary  Chase  to  make  an  examination  of  the 
San  Francisco  Mint.  He  also  examined  the  Sub-Treasury  at 
New  Orleans,  in  which  he  discovered  a  shortage  of  $1,100,000. 
This  shortage  was  reduced  by  recoveries  to  about  $680,819.53. 
Proceedings  were  instituted  against  the  former  Assistant  Treas- 
urer, but  upon  trial  he  was  acquitted.     Mr.  Knox  remained  in 

71 


tJ. 


o 


ROMANCE  AND  TRAGEDY  OF  BANKING 


charge  of  the  Sub-Treasury  and  acted  as  Assistant  Treasurer 
for  several  months. 

The  discovery  of  this  shortage  was  followed  immediately  by 
the  failure  of  the  First  National  Bank  of  New  Oi'lcans,  in  May, 
1867.  Thomas  P.  May,  who  had  been  the  United  States  Assist- 
ant Treasurer  at  New  Orleans,  resigned  that  position  to  accept 
the  presidency  of  this  bank  several  months  previous  to  its  failure. 
He  was  a  director,  but  not  president,  at  the  date  of  suspension. 
While  president  he  Avas  its  sole  manager,  and  as  a  director  he 
was  equally  potent  in  the  conduct  of  the  bank's  affairs.  Subse- 
quently it  was  discovered  that  he  was  largely  in  arrears  to  the 
United  States  as  Assistant  Treasurer,  and  the  deficit  increased 
under  his  successor,  apparently  for  his  benefit.  The  total  defal- 
cation of  both  amounted  to  the  sum  above  stated.  When  the 
defalcation  was  discovered  by  Mr.  Knox  the  bank  suspended. 

In  1867,  Mr.  Knox  was  appointed  Deputy  Comptroller  of  the 
Currency,  and  while  holding  this  position  had  supervision  of  the 
mint  and  coinage  correspondence.  He  revised  and  codified  the 
laws  relating  to  mint  and  coinage,  covering  a  period  of  about 
eighty  years'  legislation,  and  drafted  a  bill  for  the  Secretary'  of 
the  Treasury  embodying  this  codication,  which  was  submitted  by 
the  Secretary  to  Congress,  with  some  modifications,  and  later 
was  enacted  into  law  and  has  since  been  known  as  the  "Coinage 
Act  of  1873." 

Mr.  Knox  has  the  distinction  of  having  held  the  office  of 
Comptroller  of  the  Currency  for  a  longer  period  than  any  of  his 
predecessors  or  successors,  having  served  twelve  years  as  Comp- 
troller and  over  five  years  as  Deputy  Comptroller,  from  March  12, 
1807,  to  April  24,  1872.  He  resigned  as  Comptroller  to  accept 
the  presidency  of  the  National  Bank  of  the  Republic  of  New 
York  City,  which  position  he  retained  until  his  death,  which 
occurred  in  New  York  City,  February  9,  1892. 

Mr.  Knox  was  a  practical  banker  and  financier.  He  was  an 
ardent  lover  of  figures  and  took  special  delight  in  delving  into  and 
analyzing  statistics.  On  one  occasion  he  prepared  an  address 
for  delivery  before  the  American  Bankers'  Association,  entitled 
"Dry  Statistics,"  which  he  declared  to  be  more  interesting  to  him 
than  any  novel.    A  large  part  of  the  analytical  deductions  of  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  73 

tables  contained  in  his  numerous  reports  to  Congress  he  worked 
out  personally.  He  was  a  great  writer,  and  much  of  his  time 
while  Comptroller  was  occupied  in  the  preparation  of  addresses 
and  articles  for  the  public  prints  on  banking  and  currency 
subjects. 

Besides  his  twelve  annual  reports  to  Congress,  which  contain 
invaluable  statistical  information  in  regard  to  banking  in  the 
United  States,  and  discussions  of  monetary  and  banking  ques- 
tions, he  was  the  author  of  a  history  of  the  various  forms  of 
paper  money  issued  by  the  Government,  entitled  "United  States 
Notes,"  and  at  the  time  of  his  death  was  engaged  in  completing 
a  "History  of  Banking  in  the  United  States,"  which  was  revised 
and  completed  by  Bradford  Rhodes,  editor,  and  Elmer  H.  Young- 
man,  associate  editor  of  The  Bankers  Magazine  of  New  York, 
and  published  by  Bradford  Rhodes  &  Company  in  1900. 

When  Mr.  Knox  assumed  charge  of  the  Currency  Bureau  in 
1872  the  national  banks  chartered  numbered  only  1971,  and  when 
he  retired  in  1884  this  number  had  increased  to  3170.  During 
that  period  the  banks  adhered  more  closely  to  the  provisions  and 
limitations  of  the  banking  laws  in  the  character  of  the  business 
they  transacted  and  the  scope  of  their  operations  than  they  do 
at  the  present  time.  Many  of  the  questions  and  conditions  which 
subsequent  Comptrollers  have  had  to  deal  with  were  unthought 
of  in  Mr.  Knox's  time,  so  that  supervision  of  the  banks  was  not 
nearly  so  onerous  then  as  it  has  been  in  subsequent  years,  and 
he  had  more  opportunity  to  indulge  in  his  favorite  pastime  of 
writing  essays  on  banking  and  currency  questions  and  delving 
into  statistics  than  Comptrollers  of  later  years  have  had,  whose 
time  has  been  fully  absorbed  in  handling  the  steadily  increasing 
volume  of  business  and  correspondence  that  has  come  before  the 
Bureau,  leaving  them  little  opportunity  for  special  work. 

Mr.  Knox,  like  his  predecessor,  Mr.  McCulloch,  had  an  ex- 
alted opinion  of  the  dignity  and  importance  of  the  office  of  Comp- 
troller of  the  Currency.  He  was  exceedingly  sensitive  in  regard 
to  official  etiquette,  and  resentful  of  any  interference  with  or 
infringement  upon  his  statutory  prerogatives.  At  one  time  a 
chief  clerk  of  the  Treasury  Department  issued  an  order  prohibit- 
ing any  visitors  from  calling  upon  any  officer  or  employee  of  the 


74     ROMANCE  AND  TRAGEDY  OF  BANKING 

Department  during  business  hours  without  first  obtaining  his  per- 
mission. As  the  story  goes,  Mr.  Knox  disregarded  this  order, 
and  when  the  chief  clerk  learned  of  this  he  sent  for  him  to  come 
to  his  office.  The  assurance  of  this  official  so  aroused  Mr.  Knox's 
indignation  that  he  sent  him  word  that  if  he  wanted  to  see  him 
he  could  find  him  at  his  desk.  When  the  chief  clerk  called  upon 
him  a  brief  and  breezy  interview  followed,  ending  in  Mr.  Knox 
ordering  the  presumptive  chief  clerk  out  of  his  room  and  curtly 
inviting  him  to  mind  his  own  business. 

Mr.  Knox  was  very  highly  regarded  by  the  officials  of  the 
Treasury  Department  with  whom  he  came  in  contact,  and  partic- 
ularly by  the  subordinate  officers  and  clerks  of  the  Currency 
Bureau,  to  whom  he  was  ever  kind  and  considerate,  and  no 
stronger  or  more  deserving  tribute  could  be  paid  to  his  memory 
and  characteristics,  or  expressions  of  the  esteem  with  which  he 
was  held  by  the  bankers  and  business  men  of  New  York  City, 
among  whom  he  spent  the  last  years  of  his  life,  than  that  con- 
tained in  the  closing  lines  of  a  resolution  adopted  by  the  Cham- 
ber of  Commerce  of  that  city  at  the  time  of  his  death,  which 
reads  as  follows : 

Patriotic  in  his  impulses,  strong  in  his  convictions, 
thoughtful  but  reserved,  modest  yet  courageous,  a  deep 
thinker,  an  able  financier,  an  agreeable  companion,  a  kind 
friend,  an  upright  citizen,  and  a  courteous  Christian 
gentleman.  Such  is  our  judgment  of  his  character,  and 
so  shall  the  record  stand. 


Mr.  Knox^s  Annual  Reports 

Of  the  twelve  annual  reports  made  to  Congress  by  Mr.  Knox 
during  his  long  service  as  Comptroller,  perhaps  the  most  inter- 
esting, at  least  the  one  that  seemed  to  be  most  in  demand,  is  the 
report  for  1876,  in  which  he  reviewed  other  systems  of  banking 
before  the  establishment  of  the  national  system,  beginning  with 
the  Bank  of  North  America  at  Philadelphia,  organized  in  1780. 
This  was  the  first  bank  that  had  any  direct  fiscal  relations  with 
the  Government.     The  First   and   Second   Banks  of  the  United 


ROMANCE  AND  TRAGEDY  OF  BANKING  75 

States  were  briefly  sketched  by  Mr.  Knox,  and  the  struggle  which 
led  to  the  dissolution  of  the  latter. 

This  report  also  contains  an  interesting  chapter  on  the  First 
Bank  of  Massachusetts,  incorporated  in  1782,  and  the  Suffolk 
system  of  redemption  of  banknotes.  The  Bank  of  New  York, 
which  began  business  in  1784,  under  articles  of  association  drawn 
by  Alexander  Hamilton,  who  was  one  of  its  first  directors,  and 
other  banks  subsequently  organized,  are  concisely  described, 
together  with  the  politics  of  that  period,  which  appeared  to  be  a 
controlling  factor  in  the  procurement  of  bank  charters  in  the 
early  days  of  the  Republic.  These  subjects  were  followed  by  a 
discussion  of  banking  in  general  as  conducted  throughout  the 
States  of  the  Union  before  the  national  banking  system  was 
established,  and  the  whole  question  is  presented  in  a  concise  and 
convenient  form,  which  makes  the  volume  a  most  interesting  book 
of  reference  for  students  of  banking  in  the  United  States  prior 
to  the  Civil  War. 


The  Panic  of  1873 

The  first  of  the  most  important  events  that  occurred  during 
the  administration  of  Mr.  Knox  was  the  panic  of  1873, 

Much  has  been  written  on  the  subject  of  panics  and  their 
causes,  and  various  theories  have  been  advanced  as  to  their  origin, 
but  hardly  any  two  writers  agree  in  whole  as  to  the  conditions 
which  produce  such  periodical  outbreaks  or  the  remedies  neces- 
sary to  prevent  their  recurrence. 

The  same  general  conditions  that  have  preceded  and  culmi- 
nated in  panics  have  existed  at  other  periods  and  have  been  suc- 
cessfully passed  over  without  any  material  disturbance.  Every 
panic  that  has  occurred  during  the  existence  of  the  national 
banking  system  has  found  its  precipitating  cause  in  some  bank  or 
business  failure  occurring  at  a  time  when  conditions  throughout 
the  country  were  favorable  to  disturbance.  The  same  initial  dis- 
turbance happening  at  another  period  would  probably  not  have 
extended  beyond  the  city  in  which  it  occurred. 

The  panic  of  1873  was  no  exception  to  this  rule.  Whatever 
may  have  been  the  underlying  conditions  which  made  the  time 


76  ROIilANCE  AND  TRAGEDY  OF  BANKING 

propitious,  this  disturbance  started  in  New  York  City  in  the  fail- 
ure of  the  Warehouse  Security  Company,  which  suspended  Sep- 
tember 8tli.  Tliis  company  was  organized  for  the  purpose  of 
making  advances  to  dealers  in  grain  and  produce,  but  it  became 
involved  in  the  financing  of  the  Missouri,  Kansas  and  Texas  Rail- 
road. This  failure  was  followed  immediately  by  the  suspension 
of  the  banking  liouse  of  Kenyon,  Cox  &  Company,  which  became 
similarly  involved  through  the  indorsement  of  paper  of  the  Can- 
ada Southern  Railroad,  to  the  extent  of  about  $1,500,000.  Sev- 
eral of  the  smaller  stock-brokerage  firms  suspended  at  the  same 
time  and  were  followed  in  quick  succession  by  the  failure  of  Jay 
Cooke  &  Company,  Fisk  &  Hatch,  the  Union  Trust  Company, 
the  National  Trust  Company,  and  the  Commonwealth  National 
Bank,  of  New  Y^ork,  and  by  the  First  National  Bank  of  Wash- 
ington, D.  C,  with  which  the  Cooke  family  were  connected.  The 
New  York  Stock  Exchange  closed  its  doors  for  the  first  time  in 
its  history  and  remained  closed  for  a  period  of  ten  days.  The 
panic  rapidly  extended  to  other  large  cities  and  soon  became 
general  throughout  the  country.  Currency  payments  were  sus- 
pended, at  first  by  the  New  Y^ork  banks,  and  later  by  the  banks 
in  other  large  cities,  and  legal-tender  notes  commanded  a  premium 
of  from  one-fourth  of  one  per  cent,  to  three  per  cent,  over  certi- 
fied checks.  The  New  Y'ork  Clearing  House  Association  resorted 
to  the  expedient  of  issuing  clearing-house  certificates  in  denomi- 
nations of  five  and  ten  thousand  dollars,  bearing  interest  at  seven 
per  cent.  Between  September  22,  the  date  of  the  first  issue  of 
these  certificates  in  1873,  and  November  20,  the  date  of  the  last 
issue,  $26,565,000  were  issued,  all  of  which  were  redeemed  and 
canceled  in  less  than  four  months  from  the  date  of  the  first  issue. 

These  certificates  took  the  place  of  cash  in  the  settlement  of 
balances  between  the  clearing-house  banks,  and  their  issue  had 
the  effect  of  restoring  confidence  of  the  banks  in  each  other  and 
the  resumption  of  currency  payments,  which  had  been  suspended 
for  about  forty  days. 

This  panic  occurred  in  the  midst  of  prosperity,  preceded  by 
four  or  five  years  of  general  activity  in  all  lines  of  industry. 
There  had  been  an  abundant  harvest.  The  marketable  value  of 
the  products  of  the  year  were  estimated  to  be  equal  to,  if  not 


ROMANCE  AND  TIIAGEDY  OF  BANKING  77 

greater  than  that  of  the  several  previous  years,  and  there  was 
every  indication  of  a  good  fall  trade  which  had  already  set  in. 
What,  then,  was  the  cause  of  this  panic? 

In  his  annual  report  for  1873,  Mr.  Knox  ascribed  the  under- 
lying cause  to  be  as  follows : 

The  money  market  had  become  overloaded  with  debt, 
the  cost  of  railroad  construction  for  the  preceding  five  years 
being  estimated  to  have  been  $1,700,000,000,  or  about 
$3-10,000,000  annually,  while  debt  based  upon  almost  every 
species  of  property,  state,  city,  town,  manufacturing  cor- 
porations, and  mining  companies,  had  been  sold  in  the 
market.  Such  bonds  and  stocks  had  been  disposed  of  to  a 
considerable  extent  in  foreign  markets,  and  so  long  as  this 
continued  the  sale  of  similar  securities  was  stimulated  and 
additional  amounts  offered.  When  the  sale  of  such  se- 
curities could  no  longer  be  effected  abroad,  the  bonds  of  rail- 
roads and  other  enterprises  of  like  nature  which  were  in 
process  of  construction  were  thus  forced  upon  the  market, 
until  their  negotiation  became  almost  impossible.  The  bank- 
ers of  the  City  of  New  York,  who  were  burdened  with 
the  loan,  could  not  respond  to  the  demands  of  their 
creditors,  the  numerous  holders  of  similar  securities 
became  alarmed  and  the  panic  soon  extended  throughout  the 
country. 

The  bants  of  New  York  City,  Mr.  Knox  stated,  were  largely 
responsible  for  bringing  about  the  conditions  which  led  to  this 
panic.  Their  intimate  relations  with  the  transactions  of  the 
Stock  Exchange  contributed  in  a  great  measure  toward  creating 
and  fostering  the  fictitious  valuations  attained  at  home  and 
abroad  for  railroad  and  other  corporate  securities,  and  when  a 
foreign  market  could  no  longer  be  obtained  for  them  they  were 
unloaded  upon  an  already  surfeited  home  market,  which  collapsed 
under  the  strain  and  the  panic  followed. 

While  the  acute  stage  of  this  crisis  was  of  short  duration,  the 
country  at  large  did  not  fully  recover  from  the  business  prostra- 
tion resulting  therefrom  for  several  years,  and,  as  Mr.  Knox 
stated,  not  until  after  the  resumption  of  specie  payments. 


78     ROMANCE  AND  TRAGEDY  OF  BANKING 

Resumption  of  Specie  Payments 

The  next  important  event  that  occurred  during  Mr.  Knox's 
administration  of  the  Currency  Bureau  was  the  resumption  of 
specie  payments  on  January  1,  1879. 

The  Act  of  January  14,  1875,  provided  for  and  required  the 
coinage  of  silver  in  denominations  of  10,  25  and  50  cents,  of 
standard  value,  to  be  issued  in  redemption  of  an  equal  number  and 
amount  of  fractional  currency  of  similar  denominations,  until  the 
whole  amount  of  such  fractional  currency  outstanding  should  be 
redeemed. 

This  Act  also  repealed  the  limitations  upon  the  aggregate 
amount  of  circulation  of  national  banking  associations  and  its 
distribution  equally  among  the  States  and  Territories. 

The  Secretary  of  the  Treasury  was  required  to  redeem  the 
legal-tender.  United  States  notes,  in  excess  of  $300,000,000,  to 
the  amount  of  80  per  centum  of  the  sum  of  national  bank  notes 
issued  to  new  banks  or  banks  increasing  their  circulation,  and  to 
continue  the  redemption  of  such  notes  until  the  amount  outstand- 
ing was  reduced  to  $300,000,000.  The  Secretary  was  also  re- 
quired, on  and  after  January  1,  1879,  to  redeem  in  coin  United 
States  legal-tender  notes  then  outstanding  upon  their  presenta- 
tion for  redemption  at  the  office  of  the  Assistant  Treasurer  in 
New  York,  in  sums  of  not  less  than  $50,  and  the  Secretary  was 
authorized  to  issue  bonds  of  the  United  States  as  described  in 
the  Act  of  Congress  approved  July  14,  1870,  to  provide  for  such 
redemptions. 

The  Legislative,  Executive  and  Judicial  Appropriation  Act 
of  June  21,  1879,  contained  a  provision  authorizing  the  Secre- 
tary of  the  Treasury  to  use  for  the  immediate  payment  of  pen- 
sions the  legal-tender  currency  in  the  Treasury  of  the  United 
States  for  the  redemption  of  fractional  currency. 

There  is  still  outstanding  in  fractional  currency  about 
$1,998,368. 50^  a  large  part  of  which  never  will  be  presented  for 
redemption. 


'June  30,  1922. 


ROMANCE  AND  TRAGEDY  OF  BANKING  n 

In  commenting  upon  the  resumption  of  specie  payments  in  his 
report  for  1878,  Mr.  Knox  said  that  as  the  time  approached  for 
resumption,  strong  opposition  developed  and  desperate  efforts 
were  made  to  secure  a  repeal  of  the  Act,  on  the  ground  that  while 
it  was  conceded  by  those  who  opposed  resumption  that  the  Treas- 
ury and  the  banks  could  readily  redeem  their  circulating  notes, 
it  would  not  be  possible  for  the  banks  to  provide  for  the  redemp- 
tion of  their  deposits  in  gold. 

Notwithstanding  this  opposition  and  the  pessimistic  predic- 
tions of  those  who  were  opposed  to  the  attempt  at  resumption, 
and  the  return  of  the  Government  to  the  Hamiltonian  idea  of 
paying  its  debts  in  the  currency  of  the  world,  resumption  was 
successfully  consummated,  and,  as  Mr,  Knox  stated  in  his  report 
for  1878,  while  the  banks  of  the  country  at  the  date  of  resump- 
tion held  more  than  one-third  of  the  outstanding  Treasury  notes, 
they  had  so  much  confidence  in  the  ability  of  the  Secretary  of  the 
Treasury  to  successfully  maintain  resumption,  that  none  were 
presented  by  them  for  redemption.  At  the  same  time  the  people 
held  more  than  $300,000,000  of  the  issues  of  the  national  banks, 
based  upon  the  bonds  of  the  nation,  and  preferred  such  notes  to 
the  coin  itself.  There  was  no  demand,  therefore,  for  the  payment 
of  the  notes  of  the  Government,  and  the  gold  coin  in  the  Treasury 
increased  more  than  thirty-six  millions  in  the  ten  months  succeed- 
ing the  date  of  resumption. 

The  Freedman's  Savings  and  Trust  Company 

The  most  disastrous  bank  failure  that  occurred  while  Mr. 
Knox  was  Comptroller  was  that  of  the  Freedman's  Savings  and 
Trust  Company,  which  suspended  June  29,  1874. 

While  this  institution  was  not  under  Federal  supervision  at 
any  time  during  its  active  existence,  the  liquidation  of  its  affairs 
after  failure  was  finally  placed  in  charge  of  the  Comptroller  of 
the  Currency. 

During  the  progress  of  the  Civil  War,  when  the  colored  sol- 
diers became  a  considerable  element  in  the  military  service  of  the 
United  States,  it  became  necessary  to  make  some  provision  for 
the  safekeeping  of  their  pay  and  bounty  moneys  for  their  benefit 


80     ROMANCE  AND  TRAGEDY  OF  BANKING 

and  that  of  their  families.  To  meet  this  exigency,  military  sav- 
ino-s  banks  were  established  at  Beaufort,  S.  C,  and  Norfolk,  Va., 

o  

centers  at  that  time  of  colored  troops.  The  subsequent  emanci- 
pation of  the  race  increased  the  necessity  for  and  suggested  the 
advisability  of  establishing  some  financial  agency  which  would 
more  fully  meet  this  demand,  and  Congress,  under  date  of 
March  3,  1865,  passed  an  Act  constituting  Peter  Cooper,  William 
C.  Bryant,  and  forty-eight  others,  a  body  corporate,  under  the 
title  of  the  "Freedman's  Savings  and  Trust  Company,"  to  re- 
ceive on  deposit  such  sums  of  money  as  should  from  time  to  time 
be  offered  by  or  in  behalf  of  persons  who  had  heretofore  been 
held  in  slavery  in  the  United  States,  or  the  descendants  of  such 
persons,  and  to  invest  the  same  in  the  stocks,  bonds,  Treasury 
notes,  or  other  securities  of  the  United  States. 

No  capital  stock  was  required,  but  in  lieu  thereof,  the  Charter 
Act  authorized  and  required  not  exceeding  one-third  of  the  de- 
posits to  be  retained  in  a  readily  convertible  form,  for  the  pur- 
pose of  meeting  withdrawals  and  to  defray  the  operating  expenses 
of  the  company. 

The  principal  office  of  this  institution  was  located  in  Wash- 
ington, D.  C,  opposite  the  north  front  of  the  Treasury  Depart- 
ment, in  a  four-story  brownstone  building  owned  by  the  com- 
pany. After  the  bank  failed,  this  building  w^as  purchased  by  the 
Government  for  the  sum  of  $250,000.  For  some  years  thereafter 
it  was  occupied  by  the  Department  of  Justice  and  the  Court  of 
Claims  and  was  then  demolished  to  make  room  for  the  new  De- 
pax'tment  of  Justice  building  to  be  erected  on  the  site.  The  sum 
appropriated  by  Congress,  however,  was  not  deemed  sufficient  for 
the  erection  of  a  building  adequate  and  suitable  for  the  Depart- 
ment's needs,  so  the  site  remained  vacant  until  1918,  when  a  build- 
ing was  erected  thereon  by  the  Government  for  the  use  of  the 
Treasury  Department  and  is  connected  with  the  main  building 
by  a  tunnel  underneath  Pennsylvania  Avenue. 

At  the  date  of  the  failure  of  this  company  it  had  thirty-four 
branch  agencies  in  active  operation,  located  at  the  principal  cen- 
ters of  colored  population  in  Southern  States,  except  one  each 
in  New  York,  Philadelphia  and  Baltimore. 


ROMANCE  AND  TRAGEDY  OF  BANKING  81 

During  the  ten  years  of  its  active  existence,  the  deposits  in 
this  institution  aggregated  over  $57,000,000,  and  its  depositors 
numbered  over  70,000. 

From  1865  to  1870,  the  bank  seemed  to  have  been  honestly 
and  successfully  conducted  by  the  trustees  in  charge  of  its  affairs, 
and  apparently  enjoyed  the  full  confidence  of  its  depositors,  in 
the  knowledge  and  belief  that  their  deposits  were  required  by  the 
Charter  Act  to  be  safely  invested  in  the  stocks,  bonds,  treasury 
notes  and  other  securities  of  the  United  States. 

In  May,  1870,  however.  Congress  amended  the  act  of  incor- 
poration empowering  the  trustees  to  invest  one-half  of  the  de- 
posits received  "in  bonds  or  other  notes  secured  by  mortgages  on 
real  estate  in  double  the  value  of  the  loan." 

This  amendment  opened  the  door  to  the  wild  speculation  in 
real  estate  which  immediately  followed,  and  to  other  culpable 
transactions  which  soon  absorbed  the  funds  of  the  bank  and  led 
to  the  failure  of  the  institution. 

When  this  proposed  amendment  was  under  consideration  in 
the  Senate  in  1870,  Senator  Cameron  of  Pennsylvania  vigorously 
opposed  its  adoption  for  the  reasons,  he  said,  that — 

The  worst  thing  to  loan  money  upon  by  an  institution 
of  which  a  number  of  persons  have  the  direction  is  real 
estate. 

If  I  had  money  to  loan  and  did  not  care  about  using  it 
soon  and  wanted  to  invest  it  for  a  long  time,  I  might 
think  it  very  well  to  loan  it  upon  bond  and  mortgage,  be- 
cause I  should  myself  estimate  the  value  of  the  property 
which  was  offered  to  me  according  to  my  own  judgment. 
But  it  is  not  so  in  a  board  of  ten  or  fifteen  directors. 

Mortgages  are  all  right,  in  their  way.  They  are  good 
security  for  money,  but,  the  trouble  is,  money  once  in  them 
stays  there.  They  have  no  commercial  value.  They  have 
no  quotation.  Banks  loaning  their  money  upon  them  would 
soon  absorb  their  capital  and  find  themselves  exceedingly 
embarrassed  in  case  of  distress  or  a  panic.  They  are  not 
readily  converted,  and  it  is  only  idle  capital  that  seeks 
such  investments.  Banking  capital  is  of  a  different  charac- 
ter. If  tied  up  in  mortgages  or  other  investments,  its 
usefulness   becomes   paralyzed   and   the   law   defeated   under 


82     ROMANCE  AND  TRAGEDY  OF  BANKING 

which  the  bank  was  organized.  This  is  the  direct  cause  of 
the  unfortunate  condition  of  the  early  banks  in  Kansas, 
and  in  many  other  of  the  extreme  western  states  and  ter- 
ritories. They  loaned  money  to  settlers  at  fabulous  rates 
and  took  mortgages  upon  their  farms  in  violation  of  law. 
They  soon  came  to  grief  and  found  their  vaults  full  of 
mortgages  upon  real  estate  that  would  not  pay  twenty-five 
cents  on  the  dollar  and  their  money  all  gone. 

He  contended  further  that  the  principle  proposed  was  a  dan- 
gerous one,  and  should  not  be  incorporated  into  any  banking 
institution.  He  stated  that  it  had  been  his  experience  that  when- 
ever a  bank  like  the  Freedman's  Savings  and  Trust  Company  in- 
vested its  funds  in  real  estate  it  went  to  destruction.  This 
prophecy  was  fulfilled  four  years  later  by  the  failure  of  this 
bank. 

At  the  time  this  radical  change  was  authorized  in  the  char- 
acter of  the  securities  to  be  taken  for  loans,  the  deposits  amounted 
to  at  least  $2,000,000.  Had  the  original  Act  been  allowed  to 
remain  as  it  was  and  the  requirement  in  respect  to  investments 
been  complied  with,  as  they  undoubtedly  would  have  been,  the 
face  value  of  the  United  States  securities  which  the  bank  then 
should  have  had,  would  have  exceeded  the  sum  stated  by  a  very 
large  percentage,  and  their  market  value  would  have  been  much 
greater,  but  at  the  date  of  failure  of  the  bank  only  $400  in  United 
States  securities  were  found  among  the  assets. 

On  June  29,  1874,  the  bank  having  been  ascertained  to  be  in- 
solvent, was  closed  by  a  vote  of  its  trustees,  who  appointed  three 
Commissioners  to  wind  up  its  affairs.  These  Commissioners  served 
from  July  11,  1874,  to  February  21,  1881,  on  which  later  date, 
by  Act  of  Congress,  all  the  remaining  assets  of  the  bank  were 
transferred  to  the  custody  and  supervision  of  the  Comptroller 
of  the  Currency,  who  was  placed  in  charge  of  the  liquidation  of 
its  affairs,  and  was  allowed  compensation  of  one  thousand  dollars 
per  annum. 

At  the  time  of  the  failure  of  this  company  there  were  61,131 
depositors,  to  whom  there  was  due  $2,939,925.22.  Five  dividends 
were  declared,  amounting  to  sixty-two  per  cent,  of  the  deposit 


ROMANCE  AND  TRAGEDY  OF  BANKING  83 

liabilities,  aggregating  $1,822,753.62.  Payment  of  these  divi- 
dends was  made  from  time  to  time,  and  at  the  close  of  the  year 
ended  December  1,  1920,  $1,733,475.71  of  the  above-mentioned 
amount  had  been  paid  and  the  affairs  of  the  bank  finally  closed. 

Repeated  efforts  have  been  made  to  secure  an  appropriation 
by  Congress  for  the  payment  of  the  remaining  thirty-eight  per 
cent,  due  the  depositors,  and  bills  have  been  introduced  from  time 
to  time  and  favorably  reported  in  one  or  the  other  House.  In 
1888  a  bill  passed  the  Senate  authorizing  the  payment  to  depos- 
itors of  African  descent  the  difference  between  their  claims  and 
the  dividends  yielded  by  the  assets  of  the  company,  but  failed  of 
favorable  action  in  the  House  of  Representatives  because  of  the 
restriction  in  the  bill  to  the  payment  of  colored  depositors  only. 

While  this  institution  was  intended  to  be  a  colored  people's 
bank  exclusively,  and  the  Charter  Act  authorized  the  receipt  of 
deposits  only  "by  or  on  behalf  of  persons  heretofore  held  in  slav- 
ery in  the  United  States  or  their  descendants,"  a  large  propor- 
tion of  the  depositors  were  white. 

The  reason  given  for  accepting  deposits  from  the  white  people 
was  that  the  officers  of  the  company  did  not  feel  that  it  was  in- 
cumbent upon  them  to  inquire  when  a  deposit  was  tendered  by  a 
white  person,  whether  it  was  being  made  on  behalf  of  a  colored 
person.  So  every  deposit  that  was  offered  was  received  without 
question. 

This  institution  was  not  under  Federal  supervision  and  the 
United  States  Government  was  in  nowise  responsible  for  its  man- 
agement. The  only  ground  upon  which  the  Government  can  be 
urged  to  assume  its  remaining  liabilities  is  one  purely  of  senti- 
ment. The  creditors  have  no  legal  claim  upon  the  Government. 
But  it  is  contended  that  illiterate  colored  people  were  induced  to 
deposit  their  money  in  this  bank  in  the  belief  that  it  was  a  Gov- 
ernment institution  and  that  the  Government  assumed  responsi- 
bility for  its  liabilities.  A  considerable  number  of  the  depositors 
in  this  company,  however,  were  intelligent  white  people,  and  many 
of  the  colored  depositors  were  as  intelligent  and  as  well  informed 
in  regard  to  the  character  of  the  institution  and  the  Govern- 
ment's connection  with  it  as  the  average  depositor  in  a  national 
bank.     So  far  as  the  Government's  relations  with  this  institution 


84     ROMANCE  AND  TRAGEDY  OF  BANKING 

are  concerned  the  creditors  of  an  insolvent  national  bank  have  a 
more  equitable  claim  on  Congress  for  an  appropriation  to  pay 
the  bank's  liabilities  than  have  the  depositors  in  the  Freedman's 
Savings  and  Trust  Company.  The  Government  does  undertake 
to  assume  supervision  over  national  banks,  but  it  had  no  super- 
vision whatever  over  this  institution. 

If  Congi-ess  should  appropriate  the  money  necessary  to  pay 
these  claims,  it  will  be  found  very  difficult  to  distribute  this  fund 
among  the  colored  creditors  or  their  heirs.  Most  of  the  original 
colored  depositors  are  dead,  and  because  of  the  inability  of  their 
heirs  to  prove  their  claims  for  balances  due,  it  was  almost  impos- 
sible to  distribute  any  considerable  amount  of  the  remaining  funds 
in  the  hands  of  the  Commissioner  since  the  repeal  of  the  bar  to 
further  payments,  and  during  the  later  years  the  larger  part  of 
such  fund  was  consumed  in  the  pa3'^ment  of  the  salary  of  the  Com- 
missioner and  clerical  expenses.  The  small  amount  due  many  of 
these  colored  depositors  would  not  warrant  the  expense  of  prov- 
ing a  claim.  At  the  time  of  the  failure  of  this  institution  more 
than  fifteen  thousand  of  the  depositors  had  to  their  credit  an  aver- 
age balance  of  not  more  than  five  dollars.  As  a  great  many  of 
these  depositors  are  dead  and  most  of  them  left  several  heirs, 
some  of  whom  have  also  died,  the  death  of  the  depositor  and  any 
deceased  heir  would  necessarily  have  to  be  proven  by  the  surviv- 
ing heirs  to  entitle  them  to  receive  the  balance  due. 

It  is  exceedingly  doubtful,  therefore,  whether  the  class  of  col- 
ored depositors  in  this  institution  intended  to  be  relieved  by  such 
an  appropriation  would  be  benefited  thereby.  And  as  far  as  the 
other  depositors  are  concerned,  the  Government  would  establish 
a  very  bad  precedent  in  assuming  for  their  benefit  the  liabilities 
of  an  institution  for  whose  management  and  solvency  it  was  in 
nowise  responsible. 


Real  Estate  Loans  by  National  Banks 

Frequent  efforts  were  made  to  secure  an  amendment  of  the 
national  banking  laws  to  permit  loans  to  be  made  upon  the  secur- 
ity of  real  estate.     Bills  of  this  nature  were  introduced  from  time 


ROMANCE  AND  TRAGEDY  OF  BANKING  85 

to  time  and  passed  the  House  of  Representatives,  but  failed  of 
favorable  action  in  the  Senate. 

The  original  Bank  Act,  approved  February  25,  1863,  con- 
ferred authority  upon  national  associations  to  loan  money  "on 
real  and  personal  security."  The  Act  of  June  3,  1864!,  contained 
the  same  provision  when  the  bill  was  reported  to  the  House  and 
Senate,  but  during  the  debate  on  the  bill  the  words  "real  and" 
were  eliminated,  and  the  provision  as  finally  adopted  read  "by 
loaning  money  on  personal  security." 

When  an  amendment  was  offered  to  the  bill  to  strike  out  the 
words  "real  and,"  Mr.  Brooks,  a  representative  from  New  York, 
said  that  the  banks  in  the  State  of  New  York  for  a  considerable 
time  discounted  notes  and  loaned  money  on  the  security  of  real 
estate  mortgages.  Experience,  however,  he  said,  soon  taught  the 
bankers  that  this  was  a  dangerous  system  of  banking,  and  the 
western  states  which  copied  the  original  banking  law  of  New  York 
suffered  greatly  thereby.  New  York  bankers,  he  said,  were  also 
taught  that  the  use  of  real  estate  in  commercial  banking  was 
unsafe. 

Mr.  Brooks  stated  further  that  the  principle  of  commercial 
banking  requires  two  immediately  available  securities:  First,  the 
drawer  of  the  note;  second,  the  endorser.  If  a  mortgage  on  real 
estate,  he  said,  is  given  as  security,  the  mortgage  has  to  be  fore- 
closed and  all  the  laws  in  relation  to  the  transfer  of  the  realty 
have  to  be  gone  through  with  before  the  real  estate  can  be  made 
available  for  the  purpose  of  converting  the  security  on  the 
market. 

Mr.  Washburne,  of  Illinois,  stated  that  the  provision  author- 
izing commercial  banks  to  loan  money  on  realty  was  a  vicious  sys- 
tem of  banking,  and  one  which  he  could  not  sanction. 

Mr.  Boutwell,  afterward  Secretary  of  the  Treasury,  said  that 
he  had  supposed  that  commercial  banks  empowered  to  loan  money 
on  real  estate  had  almost  ceased  to  exist  in  the  commercial  world. 
Mr.  Hooper,  of  Massachusetts,  who  was  in  charge  of  the  bill, 
stated  that  he  was  perfectly  willing  to  accept  an  amendment  to 
strike  out  the  objectionable  provision,  and  upon  his  motion  the 
words  "real  and"  were  stricken  out  of  the  bill  and  the  section 
amended  to  read  "by  loaning  money  on  personal  security."    This. 


86  R01VLA.NCE  AND  TRAGEDY  OF  BANKING 

amendment  was  adopted  without  division  and  remained  the  law  up 
to  the  passage  of  the  Federal  Reserve  Act,  December  23,  1913, 
which  provides  as  follows : 

Any  national  banking  association  not  situated  in  a 
central  reserve  city  may  make  loans  secured  by  improved 
and  unencumbered  farm  land,  situated  within  its  Federal 
reserve  district,  but  no  such  loan  shall  be  made  for  a  longer 
time  than  five  years,  nor  for  an  amount  exceeding  fifty 
per  centum  of  the  actual  value  of  the  property  offered  as 
security.  Any  such  bank  may  make  such  loans  in  an  ag- 
gregate sum  equal  to  twenty-five  per  centum  of  its  capital 
and  surplus  or  to  one-third  of  its  time  deposits  and  such 
banks  may  continue  hereafter  as  heretofore  to  receive  time 
deposits  and  to  pay  interest  on  the  seme. 

The  Federal  Reserve  Board  shall  have  power  from  time 
to  time  to  add  to  the  list  of  cities  in  which  national  banks 
shall  not  be  permitted  to  make  loans  secured  upon  real  es- 
tate  in   the   manner   described   in   this    section. 

There  is  no  doubt  that  the  elimination  from  the  National 
^ank  Act  of  1864  of  the  power  to  make  loans  upon  the  security 
of  real  estate  removed  a  dangerous  principle  from  the  banking 
laws,  and  contributed  largely  to  the  safety  and  success  of  the 
national  banking  system. 

The  subsequent  pressure  from  time  to  time  for  the  privilege 
of  making  real  estate  loans  came  largely,  if  not  wholly,  from 
banks  of  the  smaller  capital  class,  or  what  were  known  as  fifteen 
per  cent,  reserve  or  country  banks.  Since  the  passage  of  the  Act 
of  March  14,  1900,  authorizing  the  organization  of  banks  with 
a  capital  of  twenty-five  thousand  dollars,  a  considerable  number 
of  banks  of  this  class  have  been  organized  and  many  of  them  were 
converted  State  institutions,  or  reorganized  State  or  private 
banks.  Before  their  admission  to  the  national  system,  many  of 
them  had  been  accustomed  to  making  loans  upon  the  security  of 
real  estate,  and  when  they  became  national  associations  they  nat- 
urally felt  the  restraint  of  the  law  prohibiting  such  loans.  They 
wore  induced  to  nationalize  in  the  first  place  because  of  the 
greater  advantages  which  they  thought  the  national  system  af- 


ROMANCE  AND  TRAGEDY  OF  BANKING  87 

forded  over  state  and  private  banks.  At  the  same  time,  while 
reaping  whatever  benefits  were  to  be  derived  from  incorporation 
under  national  authority,  they  desired  to  continue  the  business  of 
making  loans  on  mortgage  security  and  to  exercise  other  powers 
not  permitted  by  the  national  banking  laws. 

Many  national  bankers  do  not  regard  real  estate  mortgage 
loans  with  favor,  and  will  not  avail  themselves  of  the  privilege  of 
making  such  loans,  now  that  they  are  permitted  by  law  to  a  lim- 
ited extent.  The  demand  for  such  a  privilege  did  not,  therefore, 
come  from  this  class  of  bankers. 

Of  all  the  banks  in  the  national  system,  it  is  most  essential 
that  the  very  banks  that  were  most  clamorous  for  the  privilege 
of  making  real  estate  loans  should  keep  their  assets  in  a  quickly 
convertible  form. 

Under  the  national  banking  laws  banks  have  been  permitted 
to  take  real  estate  mortgages  to  prevent  loss  on  debts  previously 
contracted  in  good  faith,  and  to  acquire  title  to  the  property,  if 
necessary,  in  satisfaction  of  debts,  but  the  statute  requires  that 
realty  so  acquired  shall  be  disposed  of  within  five  years.  Banks 
have  found  it  very  difficult  in  the  past  to  dispose  of  real  estate 
within  the  limit  of  time  prescribed  by  the  statute  without  incur- 
ring considerable  loss.  The  result  is  that  more  or  less  realty  of 
an  unproductive  character  accumulates  on  their  hands. 

If,  therefore,  under  the  limited  privileges  above  referred  to, 
banks  have  accumulated  so  much  real  estate  during  the  course  of 
their  existence  and  have  found  it  so  difficult  to  realize  on  mort- 
gage loans,  or  to  dispose  of  either  the  realty  or  the  mortgages, 
is  there  not  great  danger  that  in  permitting  loans  to  be  made 
directly  upon  real  estate  security  the  amount  invested  in  such 
loans,  and  the  realty  that  will  be  taken  in  addition  thereto  as 
security  for  or  in  satisfaction  of  bad  debts,  will  absorb  and  tie 
up  such  a  large  proportion  of  deposits  in  this  inconvertible  form 
as  to  bring  about  a  similar  condition  of  affairs  in  many  banks  as 
existed  in  the  Freedman's  Savings  and  Trust  Company,  and  with 
like  results. 

Notwithstanding  the  experiences  of  the  past,  many  national 
bankers  who  favor  real  estate  loans  claim  that  real  estate  mort- 
gages are  the  very  best  security  to  be  obtained  in  their  respective 


88  ROIVIANCE  AND  TRAGEDY  OF  BANKING 

localities,  and  are  eminently  better  than  stocks,  bonds  or  com- 
mercial paper.  In  some  sections  of  the  country  this  may  be,  and 
no  doubt  is  true,  provided  such  loans  are  limited  to  a  safe  per- 
centage of  the  actual  value  of  the  real  estate  mortgaged,  and 
restricted  in  the  total  amount  of  such  loans.  But  in  other  locali- 
ties the  reverse  would  be  the  case.  In  sections  of  the  country 
where  the  actual  value  of  farm  lands  is  unsettled  and  more  or  less 
speculative,  mortgage  loans  will  be  the  very  worst  kind  of  an 
investment  for  banks  to  make. 

The  persistent  pressure  upon  the  Comptroller's  office  before 
the  passage  of  the  Federal  Reserve  Act  for  a  more  liberal  inter- 
pretation of  the  law  in  respect  to  real  estate  loans,  also  had  its 
effect  in  later  years,  and  through  liberal  administrative  rulings 
based  upon  strained  interpretation  of  the  statutes  many  loans 
were  permitted  to  be  made  upon  real  estate  mortgages  by  indirect 
methods  which  formerly  were  held  to  be  unlawful. 


Interpretation  of  the  Banking  Laws 

The  rule  laid  down  by  the  Supreme  Court  of  the  United  States 
for  interpreting  the  national  banking  laws  is,  that  "the  intent, 
not  the  letter  of  the  statute,  constitutes  the  law."  The  same 
court  has  also  held  that  "while  Section  5136,  United  States  Re- 
vised Statutes,  does  not  in  plain  terms  prohibit  a  loan  on  real 
estate,  the  implication  to  that  effect  is  clear,  and  what  is  implied 
is  as  effectual  as  if  it  were  expressed." 

It  cannot  be  disputed  that  the  intent  of  the  National  Bank 
Act  of  186-i  was  to  prohibit  loans  being  made  upon  the  security 
of  real  estate  mortgages,  and  as  the  courts  have  declared  that 
what  a  bank  is  prohibited  from  doing  directly  it  cannot  lawfully 
do  indirectly,  it  follows  that  when  real  estate  loans  were  made  in- 
directly in  a  form  to  evade  or  circumvent  the  restrictions  of  the 
statute,  they  were  as  much  in  contravention  of  law  as  if  made 
directly,  and  no  administrative  ruling  or  distorted  interpretation 
of  the  law  can  legalize  an  unlawful  transaction. 

The  question  of  good  faith  enters  largely  into  all  transactions 
involving  loans  indirectly  secured  by  liens  on  realty,  and  the  facts, 


ROMANCE  AND  TRAGEDY  OF  BANKING  89 

not  the  form  of  the  transactions,  determine  their  legality  or 
illegality. 

Examinations  of  national  banks  and  supervision  by  the  Comp- 
troller of  the  Currency  should  be  as  practical  as  possible,  and 
practical  experience  as  to  the  numerous  subterfuges  resorted  to 
by  banks  to  circumvent  the  law  in  respect  to  real  estate  loans,  is 
a  safer  guide  for  the  examiner  and  Comptroller  to  follow  in  deter- 
mining the  good  faith  of  a  transaction  than  legal  theorizing, 
which,  while  usually  following  the  letter  of  the  statute,  generally 
loses  sight  of  its  intent  or  spirit. 

Especially  is  this  true  in  the  light  of  the  fact  that  it  has  been 
impossible  to  obtain  a  unanimous  opinion  of  an  Appellate  Court 
upon  any  question  involving  an  interpretation  of  the  old  provision 
of  the  national  banking  law  in  regard  to  real  estate  loans  even  by 
so  eminent  a  body  of  jurists  as  composes  the  Supreme  Court  of 
the  United  States,  which  upon  this  very  question  rendered  a 
divided  opinion. 

Until  the  position  of  the  Comptroller's  office  on  this  subject 
was  amended  in  later  years  to  conform  to  the  views  of  bankers 
who  desired  to  make  real  estate  loans,  it  was  held,  and  very  pi'op- 
erly  so,  that  it  was  unlawful  for  a  bank  to  purchase  or  discount 
a  real  estate  mortgage  note,  even  though  the  mortgage  did  not 
run  directly  to  the  bank  and  the  endorser  or  assignor  of  the  note 
was  alleged  to  be  financially  responsible  for  the  loan  without  re- 
course to  the  mortgage. 

In  other  words,  a  note  in  this  form  was  held  to  be  simply  two- 
name  paper  secured  by  collateral,  the  collateral  being  the  real 
estate  mortgage.  The  owner  of  the  note,  in  the  event  of  non- 
payment by  the  maker  at  maturity,  could  proceed  to  collect  the 
loan  from  the  endorser,  or  convert  the  security  by  foreclosure. 
In  many  cases  of  this  kind  the  latter  course  was  necessary,  as 
the  endorser  of  the  note  was  frequently  financially  irresponsible, 
and  the  bank  knew  it  at  the  time  the  loan  was  made  and  would 
not  have  made  it  but  for  the  mortgage  security  back  of  the  note. 

While  this  question  never  has  been  directly  before  the  courts, 
there  is  sufficient  authority  in  support  of  the  position  that  the 
assignment  of  a  mortgage  note  carries  with  it  an  assignment  of 
the  mortgage,  to  be  found  in  the  dictum  of  the  courts.     In  the 


90  ROIVIANCE  AND  TRAGEDY  OF  BANKING 

case  of  the  First  National  Bank  of  Mankato  v.  Pope  et  al,  the 
Supreme  Court  of  Minnesota  held  that  where  a  promissory  note 
secured  by  a  mortgage  on  real  estate  is  endorsed  and  transferred 
to  a  purchaser  without  formal  assignment  of  the  morgage,  the 
security  follows  the  note  as  an  incident  thereto,  and  the  purchaser 
becomes  the  equitable  owner  of  the  mortgage,  acquiring  an  inter- 
est which  enables  him  to  deal  with  it  for  all  purposes. 

Banking  Conducted  on  Widely  Different  Lines  Than  Formerly 

Banking  today  is  conducted  upon  widely  different  lines  to 
what  it  was  when  the  Bank  Act  of  1864)  was  enacted,  and  the  law 
has  not  kept  pace  with  the  constantly  changing  conditions.  Com- 
petition with  trust  companies  and  other  banking  institutions  op- 
erating under  State  authority,  more  liberal  in  the  scope  of  cor- 
porate powers  conferred,  forced  many  competing  national  asso- 
ciations doing  business  in  the  same  locality  into  undertakings  not 
contemplated  by  the  national  banking  laws  and  foreign  to  the 
legitimate  functions  of  a  commercial  bank.  The  powers  conferred 
upon  trust  companies  and  savings  banks  to  make  loans  upon  real 
estate  security,  induced  many  national  associations  to  make  loans 
upon  like  security  by  resorting  to  indirect  methods  to  evade  the 
restrictions  of  the  statute.  This  was  particularly  true  of  locali- 
ties where  mortgage  loans  were  the  principal  securities  dealt  in 
by  savings  banks  and  trust  companies. 

While  the  national  banking  laws  should  be  construed  as 
broadly  and  as  liberally  as  is  possible  consistent  with  the  intent 
and  spirit  of  the  statutes,  it  is  the  sworn  dut}'  of  an  administra- 
tive officer  to  enforce  an  observance  of  the  law  as  it  exists  and 
not  endeavor  to  twist  it  out  of  shape  either  to  meet  his  own  views 
or  the  wishes  of  bankers  as  to  what  it  should  be. 

Unfortunately  there  has  been  too  much  of  a  disposition  in 
later  years  in  the  administration  of  the  Currency  Bureau  to 
change  existing  law  by  administrative  regulations  or  rulings,  un- 
warranted by  any  reasonable  construction  of  the  statutes,  to  meet 
the  demands  incident  to  competition  between  national  and  State 
institutions.  In  no  respect  was  this  fact  more  patent  than  in  its 
application  to  real  estate  loans.     Official  rulings  in  this  connec- 


ROMANCE  AND  TRAGEDY  OF  BANKING  91 

tion  practically  nullified  the  prohibitive  provisions  of  the  statutes 
and  conferred  upon  the  banks  privileges  which  had  been  denied 
them,  up  to  that  time,  by  Congress  since  1864. 

Under  such  interpretations  of  the  law,  the  bar  to  real  estate 
loans  was  removed,  and  indirect  methods  of  circumventing  the 
statutes  were  recognized  as  legitimate,  notwithstanding  the  dec- 
laration of  the  Supreme  Court  of  the  United  States  that  what  a 
bank  is  prohibited  from  doing  directly  it  cannot  lawfully  do  in- 
directly. 

National  Bank  Failures 

During  the  twelve  years  that  Mr.  Knox  presided  over  the 
affairs  of  the  Currency  Bureau,  there  were  seventy-three  national 
bank  failures.  The  largest  of  these  was  the  National  Bank  of  the 
State  of  Missouri  at  St.  Louis. 

This  bank  had  a  capital  of  $2,500,000.  Its  total  liabilities 
at  the  time  of  failure  were  about  $5,400,000.  It  was  chartered 
in  October,  1866,  and  was  placed  in  the  hands  of  a  receiver 
June  23,  1877.  The  cause  of  its  failure  was  fraudulent  manage- 
ment, excessive  loans  to  its  officers  and  directors,  and  deprecia- 
tion of  securities.  There  was  collected  by  the  receiver  from  its 
assets  $2,846,622,  and  from  its  stockholders  by  assessment 
$245,108,  of  which  amount  there  was  returned  to  the  shareholders 
in  cash  $26,720,  and  the  depositors  and  other  creditors  were  paid 
one  hundred  per  cent,  of  their  claims  with  interest.  The  receiver- 
ship was  finally  closed  March  26,  1888. 

In  commenting  upon  this  and  other  failures  of  that  year,  Mr. 
Knox,  in  his  annual  report  for  1877,  stated  that  the  most  fruitful 
cause  of  bank  failures  was  the  unlawful  use  of  the  funds  or  credits 
of  these  associations  by  their  officers  and  directors,  and  that  in 
most  instances  this  was  accomplished  through  malfeasance  or 
crime  by  the  discount  of  notes  in  which  the  bank  had  no  interest. 

He  therefore  recommended  in  this  connection  the  passage  of 
an  Act  prohibiting  a  bank  from  borrowing  money  upon  its  own 
obligations,  or  from  lending  its  credit,  and  also  from  obtaining 
rediscounts  upon  its  bills  receivable,  unless  specifically  authorized 
by  resolution  of  its  board  of  directors,  under  the  seal  of  the  bank. 


92  ROIHANCE  AND  TRAGEDY  OF  BANKING 

This,  he  thought,  would  have  the  effect  of  putting  other  banks 
upon  their  guard  when  applied  to  for  such  favors. 

The  National  Bank  of  the  State  of  Missouri  was  the  successor 
of  the  Missouri  State  Bank,  which  was  chartered  in  1857  with  an 
authorized  capital  of  $5,000,000  and  was  converted  into  a 
national  association  on  October  31,  1866. 

The  manner  in  Avhich  this  old  and  reputable  institution  was 
converted  into  a  National  bank  and  subsequently  wiped  out  of 
existence  by  the  wrecking  of  the  latter  association  will  prove  inter- 
esting reading. 

It  appears  from  the  published  history  of  this  case  that  in 
1857,  when  the  Missouri  State  Bank  was  chartered,  the  State 
subscribed  for  ,$1,000,000  of  the  capital  stock  and  issued  bonds 
in  payment  therefor.  The  stock  was  also  distributed  among  indi- 
vidual subscribers  and  was  later  increased  to  $3,500,000,  making 
the  institution  the  largest  bank  in  point  of  capital  stock  and  the 
leading  bank  west  of  the  Allegheny  Mountains  at  that  time. 

An  Act  of  the  State  Legislature  was  passed  in  1866  author- 
izing the  Governor  to  receive  proposals  for  the  purchase  of  the 
State's  interest  in  the  bank,  and  State  bonds  were  authorized  to 
be  received  in  payment  for  the  stock.  The  market  value  of  these 
bonds  at  that  time  was  about  seventy  cents  on  the  dollar,  with 
four  years'  accrued  interest.  The  Act  required  the  proceeds  of 
the  sale  of  the  bank  stock  to  be  reserved  as  a  permanent  State 
school  fund. 

The  bids  for  the  purchase  of  the  stock  were  opened  by  a  Com- 
missioner at  the  Planters'  House  in  St.  Louis,  in  November,  1866. 
There  were  onU^  two  proposals  received  for  the  stock,  and  one 
of  these  was  from  Robert  A.  Barnes,  president  of  the  bank.  The 
other  bidder  was  James  B.  Eads.  The  market  value  of  the  stock 
at  this  time  had  been  depreciated  to  about  sixty-five  dollars  a 
share  of  the  par  value  of  one  hundred  dollars.  At  the  time  of 
the  sale,  the  State  owned  about  10,863  shares  of  the  stock  of  the 
bank.  Owing  to  some  alleged  irregularity  in  regard  to  the  pro- 
posals, the  bid  of  Eads  was  accepted,  although  it  was  said  that 
Barnes  was  ready  to  pay  more  for  the  stock  than  Eads  offered 
for  it.  Eads,  it  appears,  represented  a  pool  that  had  been  formed 
for  the  purchase  of  the  stock,  but  not  having  the  funds  to  pay 


KOMANCE  AND  TRAGEDY  OF  BANKING  93 

for  it  the  pool  borrowed  State  bonds  from  various  parties  with 
which  to  exchange  for  the  stock,  as  authorized  by  the  Act  of  the 
Legislature.  The  largest  amount  of  these  bonds  was  borrowed 
from  the  Bank  of  Commerce  of  New  York  City.  These  bonds 
were  borrowed  for  a  period  long  enough  to  enable  the  pool  to 
make  the  arrangements  necessary  for  the  conversion  of  the  State 
bank  into  a  national  association  and  to  elect  themselves  directors 
of  the  latter  institution. 

Upon  securing  a  charter  for  the  national  association,  they 
immediately  opened  negotiations  with  the  Bank  of  Commerce  of 
New  York  for  a  loan  of  a  sufficient  amount  to  enable  them  to  pay 
for  the  bonds  which  they  had  borrowed  to  make  payment  to  the 
State  for  the  stock,  and  to  carry  the  indebtedness  thereby  in- 
curred as  long  as  they  desired,  agreeing  at  the  same  time  to  retain 
control  and  possession  of  the  management  of  the  National  Bank 
of  the  State  of  Missouri.  These  negotiations  were  begun  prior 
to  the  purchase  of  the  stock  from  the  State,  but  did  not  take 
active  form  until  after  the  purchase  was  completed.  The  price 
paid  b}^  the  Eads  pool  for  the  bank  stock  owned  by  the  State  was 
$108.50  per  share. 

During  the  time  the  Bank  of  Commerce  was  engaged  in  aid- 
ing the  pool  in  the  purchase  of  the  bonds  with  which  to  make 
payment  to  the  State,  A.  R.  Barnes,  then  president  of  the  State 
Bank  of  Missouri,  employed  the  Bank  of  Commerce  to  procure 
bonds  for  him  to  enable  the  State  Bank  to  become  the  purchaser 
of  the  10,863  shares  of  stock  that  the  State  owned.  The  Bank 
of  Commerce  undertook  to  procure  the  bonds  for  Barnes,  but  it 
appears  said  nothing  to  him  concerning  the  negotiations  of  the 
Eads  pool  for  the  same  purpose.  At  this  time,  Eads  and  his 
associates  had  no  connection  with  the  Bank  of  the  State  of  Mis- 
souri officially. 

On  September  26,  1866,  before  Eads  and  the  pool  had  any 
official  connection  with  the  bank,  and  before  that  institution  had 
become  a  national  bank,  the  pool  applied  to  the  Bank  of  Com- 
merce for  a  loan  to  the  State  Bank  of  Missouri  of  $1,000,000. 
The  Bank  of  Commerce  accepted  the  proposition  in  a  resolution 
unanimously  passed  by  its    board  of  directors,    although    Mr. 


94     ROMANCE  AND  TRAGEDY  OF  BANKING 

Eads  presented  no  credentials  whatever  from  the  State  Bank  of 
Missouri  showing  his  authority  to  negotiate  a  loan  for  that  bank. 

The  State  Bank  was  converted  into  the  National  Bank  of 
the  State  of  Missouri  on  October  30,  1866,  and  the  seven  mem- 
bers of  the  Eads  pool  became  the  sole  directors  of  the  national 
association.  In  December  following,  the  proposed  loan,  although 
alleged  to  be  exclusively  for  the  personal  use  of  the  seven  direc- 
tors, was  contracted  for  in  the  name  of  the  national  bank,  with 
the  seven  directors  as  sureties  for  the  bank. 

This  money,  it  was  charged,  was  appropriated  by  the  pool  on 
receipt,  and  the  bank  never  had  the  use  of  a  dollar  of  it.  The 
loan,  it  is  reported,  was  kept  standing  for  eleven  years,  and  in- 
terest at  the  rate  of  three  per  cent,  was  paid  by  the  pool  from 
the  dividends  on  their  million  dollars'  worth  of  stock. 

The  largest  part  of  this  loan  was  repaid  to  the  Bank  of  Com- 
merce, but  at  the  time  of  the  failure  of  the  National  Bank  of  the 
State  of  Missouri,  there  remained  due  a  balance  of  ,$4!l3,750,  in- 
cluding interest  up  to  the  date  of  settlement,  less  $94,121.71  due 
from  the  Bank  of  Commerce,  which  had  in  the  meantime  also 
been  converted  into  a  national  association  under  the  title  of  the 
National  Bank  of  Commerce.  A  suit  was  instituted  by  the  latter 
bank  in  the  United  States  District  Court  at  St.  Louis,  for  the  re- 
covery of  this  balance,  and  judgment  was  awarded  the  plaintiff 
for  the  sum  of  something  like  .$445,518,  by  direction  of  the  pre- 
siding judge,  who  held  that  the  evidence  clearly  showed  that  the 
$1,000,000  was  borrowed  by  the  Eads  pool  for  the  Bank  of  Mis- 
souri and  subsequently  loaned  to  the  directors  of  the  bank  after 
its  conversion  into  a  national  association,  and  that  he  could  see 
no  basis  in  the  evidence  which  would  justify  the  jury  in  finding 
that  the  plaintiff  bank  knew  that  the  directors  of  the  defendant 
bank  intended  to  make  any  fraudulent  use  or  disposition  of  the 
money.  He  stated  further  that  if  the  jury  were  to  find  to  the 
contrary  that  he  would  deem  it  his  duty  to  set  aside  their  verdict, 
and  he  therefore  instructed  them  to  find  a  verdict  for  the  plaintiff. 

In  the  course  of  the  arguments  by  the  defendant's  counsel, 
the  judge  expressed  the  view  that  it  would  have  been  a  very  wise 
provision  for  Congress  to  have  inserted  in  the  law  a  section  pro- 
hibiting banks  from  borrowing  money  at  interest  for  the  purpose 


ROMANCE  AND  TRAGEDY  OF  BANKING  95 

of  relending,  as  no  bank  doing  business  on  that  principle  was  a 
safe  institution. 

The  receiver  of  the  failed  National  Bank  of  Missouri  took  an 
appeal  of  this  case  to  the  Supreme  Court  of  the  United  States, 
but  the  appeal  never  was  heard,  as  the  claim  of  the  National 
Bank  of  Commerce  was  compromised  by  the  payment  by  the  re- 
ceiver of  the  sum  of  $200,000,  Mr.  Eads  contributing  $50,000  of 
this  amount. 

The  other  complications  which  contributed  toward  the  failure 
of  this  bank  were  the  general  stagnation  in  business,  the  shrinkage 
in  value  of  all  kinds  of  securities,  the  large  and  unlawful  advances 
to  enterprises  in  which  some  of  the  directors  were  interested,  in- 
cluding bridge  and  jetty  constructions  and  injudicious  manage- 
ment generally.  At  the  time  of  the  failure,  the  City  of  St.  Louis 
had  on  deposit  in  the  bank  over  $257,953. 

About  six  weeks  before  the  failure,  the  bank  was  examined  by 
a  special  examiner  from  Washington,  and  as  a  result  several 
changes  were  made  in  the  board  of  directors.  At  the  first  meet- 
ing of  the  board  after  its  reorganization  a  thorough  examination 
into  the  condition  of  the  association  was  made,  under  the  super- 
vision of  the  new  board,  on  the  completion  of  which  it  was  unani- 
mously voted  to  close  the  bank  and  wind  up  its  affairs. 

Several  months  after  the  suspension  of  the  bank  and  the  ap- 
pointment of  a  receiver,  the  Federal  Grand  Jury  being  in  session 
in  St.  Louis,  a  resolution  was  adopted  by  the  jury  requesting  the 
United  States  Attorney  to  make  an  investigation  of  alleged  crimi- 
nal violations  of  law  by  the  officers  of  this  bank. 

The  United  States  Attorney  advised  the  jury  that  the  affairs 
of  the  bank  had  then  been  in  the  hands  of  the  Comptroller  of  the 
Currency  for  eighteen  months  and  if  any  criminal  violations  of 
law  had  been  discovered  in  the  management  of  the  institution  the 
receiver  and  the  Comptroller  were  doubtless  aware  of  the  fact, 
and  that  until  complaint  was  made  by  them,  or  either  of  them, 
he  did  not  feel  warranted  in  taking  any  steps  toward  an  investi- 
gation. 

In  December,  1878,  two  creditors  of  the  failed  bank  called  at 
the  office  of  the  United  States  Attorney  and  made  complaint 
against  the  president  of  the  bank,  charging  him  with  criminal 


<J6  ROMANCE  AND  TRAGEDY  OF  BANKING 

misapplication  of  the  funds  of  the  association.  These  charges 
were  made  in  writing  under  oath.  The  United  States  Attorney 
then  applied  to  the  court  for  a  subpoena  duces  tecum  directing 
the  receiver  to  appear  before  the  grand  jury  with  the  books  of 
the  bank.  An  investigation  was  then  begun,  which  lasted  about 
forty-seven  days,  and  resulted  in  the  indictment  of  the  president, 
vice-president  and  cashier  of  the  bank,  based  upon  the  testimony 
developed.  Subsequently  other  indictments,  based  upon  addi- 
tional evidence,  were  found  against  these  parties. 

Charges  Preferred  Against  Mr.  Knox  hy  the  United  States 

Attorney 

In  October,  1879,  the  United  States  Attorney  preferred 
charges  to  the  Department  of  Justice  at  Washington  against  the 
Comptroller  of  the  Currency,  John  Jay  Knox,  alleging  that  al- 
though the  bank  had  been  in  the  hands  of  a  receiver  for  eighteen 
months,  neither  the  Comptroller  nor  the  receiver  had  aided  in  or 
encouraged  the  prosecution  of  the  officers  in  any  way,  except  to 
furnish  him,  upon  application,  such  records  and  information  as 
he  called  for. 

He  charged  that  neither  the  receiver  nor  the  Comptroller  had 
denied  the  guilt  of  the  defendants,  and  that  the  Comptroller  in 
his  testimony  before  the  grand  jury  pronounced  certain  entries 
in  the  bank's  books  upon  which  indictments  were  based,  to  be 
materially  false  entries,  and  that  certain  reports  of  condition 
that  were  sworn  to  by  the  cashier  were  false  reports.  In  explana- 
tion of  why  he  had  not  repoi'ted  such  violations  of  law  to  the 
United  States  Attorney,  he  quoted  the  Comptroller  as  stating 
that  the  usage  of  his  office  was  when  officers  or  directors  were 
charged  with  criminal  violations  of  law  to  endeavor  in  the  first 
place  to  collect  what  could  be  collected  from  them,  and  having 
done  that  to  inform  the  Solicitor  of  the  Treasury  or  the  Attorney 
General  of  the  facts  in  connection  with  any  criminal  violations 
of  law  by  such  officers  for  such  action  as  they,  or  either  of  them, 
should  determine. 

The  District  Attorney  contended  that  such  a  policy  on  the 
part  of  the  Comptroller  was  not  consistent  with  his  plain  duty 


ROIVIANCE  AND  TRAGEDY  OF  BANKING  97 

as  a  public  officer.  He  assumes,  he  said,  the  right  to  retain  con- 
trol of  the  question  of  prosecution  until  he  has  exhausted  the 
pecuniary  resources  of  the  offenders  and  then  to  simply  report 
the  facts  to  the  Department  of  Justice  for  its  action.  He  stated 
further  that  the  Comptroller  of  the  Currency  is  charged  with  the 
execution  of  all  laws  and  regulations  relating  to  national  banks. 
These  laws,  he  said,  define  and  denote  what  are  criminal  violations 
of  law,  and  that  it  is  the  Comptroller's  duty  under  his  oath  of 
office  not  only  to  report  all  such  violations  of  law  to  the  Depart- 
ment of  Justice  as  soon  as  they  come  to  his  knowledge,  but  to 
voluntarily  give  the  moral  and  substantial  aid  of  his  bureau  to 
the  prosecution  of  the  offenders.  He  contended  that  the  Comp- 
troller has  no  right  to  withhold  the  facts  until  the  statute  of  limi- 
tations intervened  to  prevent  prosecution,  nor  for  a  single  day 
for  the  purpose  of  realizing  on  pecuniary  demands  for  the  benefit 
of  creditors  of  the  bank.  He  held  that  it  was  of  far  greater  im- 
portance that  offenders  against  the  law  should  meet  with  almost 
certain  punishment  that  attends  prompt  and  vigorous  prosecu- 
tion of  crime  than  that  the  creditors  of  the  bank  should  receive 
an  increased  percentage  of  dividends. 

He  charged  that  no  report  was  made,  or  even  contemplated, 
to  either  the  Solicitor  of  the  Treasury  or  the  Attorney  General, 
and  that  by  reason  of  such  neglect  the  statute  of  limitations  had 
barred  prosecution  of  some  of  the  most  flagrant  violations  of  law 
in  this  case,  some  of  which,  he  said,  were  known  to  the  Comp- 
troller's office  for  months  before  the  bank  was  closed.  He  declared 
that  through  the  grossest  frauds  and  criminal  mismanagement 
the  bank  had  been  insolvent  for  years,  and  that  the  cashier,  al- 
though under  indictment,  had  been  employed  and  retained  by  the 
receiver,  with  the  knowledge  of  the  Comptroller,  as  the  principal 
assistant  to  the  former,  at  a  salary  of  three  thousand  dollars  a 
year,  in  charge  of  the  very  books  which  contained  the  evidence 
against  him  and  his  indicted  associates. 

He  also  complained  that  in  the  compromise  of  the  claim  of 
the  National  Bank  of  Commerce,  the  receiver  had  surrendered 
notes  which  were  material  to  a  successful  prosecution  of  the  in- 
dicted officers,  and  that  the  legal  adviser  of  the  receiver  was  the 
leading  attorney  for  the  defendants  in  the  criminal  cases,  and 


98  ROIMANCE  AND  TRAGEDY  OF  BANKING 

charged  the  Comptroller  with  apparently  being  in  league  with 
the  offenders  arrayed  against  the  Government  in  its  efforts  to 
bring  them  to  justice. 

The  United  States  Attorney  concluded  his  charges  against 
the  Comptroller  with  the  statement  that  if  he  could  not  give  his 
official  support  to  the  prosecution  of  the  cases  against  the  bank 
officers,  the  Department  of  Justice  should  know  the  reason  why, 
and  he  desired  that  his  communication  to  the  Attorney  General 
be  regarded  as  a  formal  complaint  against  the  Comptroller  and 
receiver,  and  that  it  be  submitted  to  the  Secretary  of  the  Treas- 
ury, with  such  comments  as  the  Attorney  General  might  deem 
proper. 

The  charges  of  the  United  States  Attorney  were  referred  to 
the  Secretary  of  the  Treasury,  Hon.  John  Sherman,  who  in  turn 
referred  them  to  Comptroller  Knox,  Avith  a  request  for  a  report 
thereon. 


Mr.  Knox's  Reply  to  United  States  Attorney'' s  Charges 

Under  date  of  October  29,  1879,  Mr.  Knox  made  a  full  and 
detailed  reply  to  the  charges  of  the  United  States  Attorney  and 
enclosed  with  it  a  report  from  the  receiver  of  the  bank,  to  whom 
he  had  referred  that  part  of  the  United  States  Attorney's  com- 
munication relating  to  his  administration  of  the  trust  and  course 
of  action,  answering  seriatim  every  allegation  made  by  the  United 
States  Attorney. 

In  his  reply  Mr.  Knox  severely  censured  the  United  States 
Attorney  for  giving  the  public  press  a  copy  of  his  charges,  which, 
he  said,  in  some  instances  were  published  with  conspicuous  head- 
lines, attributing  to  him  the  grossest  official  negligence  and  mal- 
feasance in  office,  without  first  giving  him  an  opportunity  to  make 
answer.  He  stated  that  between  the  date  that  he  appeared  before 
the  grand  jury  and  the  date  of  the  United  States  Attorney's  com- 
munication, a  period  of  ten  months,  the  latter  had  never  made 
any  complaint  to  his  official  superiors  as  to  the  Comptroller's  or 
the  receiver's  official  conduct  in  connection  with  the  affairs  of  the 
defunct  bank,  and  that  as  no  request  was  received  from  the  United 
States  Attorney  for  official  action,  or  for  information,  that  was 


EOMANCE  AND  TRAGEDY  OF  BANKING  99 

for  a  moment  neglected  or  denied  by  either  him  or  the  receiver,  he 
had  no  cause  to  suspect  that  he  was  the  subject  of  the  United 
States  Attorney's  malevolence  or  the  hostility  displayed  by  his 
communication  and  its  publication. 

Mr.  Knox  then  stated  that  the  only  formal  complaint  made 
by  the  United  States  Attorney,  in  intelligible  and  unambiguous 
terms,  concerning  his  actions  in  relation  to  the  criminal  proceed- 
ings referred  to,  appeared  to  be  that  he  had  misunderstood  or 
failed  to  obey  the  public  statutes  which  define  the  Comptroller's 
duties,  and  that  he  was  not  in  sympathy  with  the  public  prose- 
cutor in  his  efforts  to  bring  to  justice  the  violators  of  the  national 
banking  laws.  Even  these  charges,  he  said,  were  made  by  indi- 
rection and  innuendo  rather  than  by  any  specific  allegations.  But, 
whether  made  by  vague  intimations  or  definitely  alleged,  Mr. 
Knox  declared  the  charges  to  be  maliciously  false,  and  that  he 
believed  them  to  have  been  made  by  the  United  States  Attorney, 
not  from  any  sense  of  public  duty,  but  to  subserve  personal  and 
unworthy  motives  and  purposes.  So  far  as  the  charges  related 
to  himself,  Mr.  Knox  stated,  he  knew  them  to  be  false.  So  far  as 
they  related  to  the  receiver,  he  believed  them  to  be  false,  and  that 
their  falsity  was  plainly  apparent  by  the  records  of  the  Comp- 
troller's Bureau,  and  by  the  public  history  of  the  transactions  in 
question. 

Mr.  Knox  then  proceeded  to  review  the  condition  of  the  bank 
immediately  preceding  its  failure,  and  the  action  of  the  Comp- 
troller's office  in  connection  therewith.  He  stated  that  upon  re- 
ceiving the  report  of  the  special  examiner,  which  disclosed  a  seri- 
ous impairment  of  the  capital  of  the  association,  he  at  once 
directed  a  reorganization  of  the  board  of  directors  and  a  correc- 
tion of  the  unsatisfactory  matters  which  he  called  to  their 
attention. 

After  weeks  of  searching  investigation  into  the  condition  of 
the  bank  the  reorganized  board  of  directors,  one  of  whom  was 
Hon.  John  B.  Henderson,  ex-United  States  Senator,  and  a  promi- 
nent attorney  and  citizen  of  St.  Louis,  informed  the  Comptroller 
that  the  bank  was  insolvent.  He  thereupon  appointed  Walter  S. 
Johnston  receiver,  who  proceeded  to  wind  up  the  affairs  of  the 
institution  with  noticeable  vigor  and  success. 


100  ROMANCE  AND  TRAGEDY  OF  BANKING 

Mr.  Knox  then  went  on  to  state  that  on  December  14,  1878, 
in  compliance  with  the  request  of  the  United  States  Attorney,  he 
sent  him  all  the  reports  of  condition  of  the  bank  and  the  oaths 
of  directors  and  instructed  the  receiver  to  give  him  a  copy  of  the 
report  of  the  bank  examiner,  which  was  then  in  the  receiver's  pos- 
session, and  on  December  27,  1878,  he  appeared  himself  before 
the  grand  jury  at  St.  Louis,  in  compliance  with  the  United  States 
Attorney's  request.  As  a  result  of  the  hearing  the  president, 
vice-president  and  the  cashier  of  the  bank  were  indicted.  At  a 
later  date,  another  grand  jury  made  an  investigation  of  the 
affairs  of  the  bank,  and  that  grand  jury,  too,  was  furnished  with 
all  the  information  in  possession  of  the  Bureau  and  the  receiver 
bearing  on  the  case. 

From  the  date  of  the  last  investigation  to  the  date  of  receipt 
of  the  United  States  Attorney's  complaint  to  the  Attorney  Gen- 
eral, Mr.  Knox  stated,  the  United  States  Attorney  never  sought 
his  advice  or  gave  him  any  information  concerning  the  criminal 
prosecutions,  nor  did  he  make  application  to  him  or  to  the  re- 
ceiver for  any  action,  aid  or  sympathy  in  his  proceedings  against 
the  accused,  although  he  was  always  willing  and  ready  to  co- 
operate with  him  and  to  place  at  his  disposal  any  information  or 
records  in  possession  of  the  Bureau. 

In  considering  the  complaints  made  by  the  United  States  At- 
torney relating  to  occurrences  subsequent  to  the  finding  of  the 
indictments,  Mr.  Knox  said  that  although  a  year  had  elapsed 
after  the  indictments  were  found,  the  accused  had  not  yet  been 
brought  to  trial. 

In  explanation  of  the  United  States  Attorney's  imputation 
that  the  action  of  Mr.  Knox  in  accepting  payment  from  Mr.  Eads 
in  settlement  of  his  indebtedness  to  the  bank  and  surrendering  to 
him  the  evidence  of  his  indebtedness,  injuriously  affected  the  in- 
terests of  the  prosecution,  Mr.  Knox  stated  that  he  accepted  from 
Mr.  Eads,  under  an  order  of  a  competent  court,  a  large  sum  of 
money  in  full  satisfaction  of  his  indebtedness  to  the  bank,  believ- 
ing the  settlement  to  be  of  vital  importance  to  the  interests  of  the 
creditors  of  the  association,  and  in  doing  so  he  did  not  condone 
any  infractions  of  the  law  nor  deprive  the  prosecution  of  any 
evidence  which  the  District  Attornev  intended  or  desired  to  use. 


ROMANCE  AND  TRAGEDY  OF  BANKING  101 

In  regard  to  the  United  States  Attorney's  complaint  that  the 
receiver  of  the  bank  retained  in  his  employ  the  late  cashier,  after 
his  indictment,  and  that  he  retained  as  his  counsel  ex-Senator 
Henderson,  a  director  of  the  bank,  who  was  also  the  counsel  for 
one  of  the  defendants,  Mr.  Knox  stated  that  he  had  no  knowledge 
of  these  facts  until  he  read  the  complaint  of  the  United  States 
Attorney,  and  he  expressed  the  opinion  that  if  the  United  States 
Attorney  sincerely  thought  that  the  employment  of  these  persons 
by  the  receiver  was  detrimental  to  the  interests  of  the  prosecu- 
tion, it  was  his  duty  to  have  so  advised  the  Comptroller,  but  that 
his  failure  to  do  so,  justified  the  inference  that  he  made  these 
accusations  and  gave  publicity  to  them  merely  to  subserve  his 
own  interests.  He  then  quoted  from  the  receiver's  letter  his  rea- 
sons for  employing,  and  continuing  in  his  employ,  the  parties 
referred  to. 

Mr.  Knox  denied  that  the  criminal  sections  of  the  national 
banking  laws  imposed  any  duties  whatever  upon  the  Comptroller 
of  the  Currency,  but  that  it  was  the  duty  of  the  United  States 
Attorney  to  prosecute  in  his  district  all  delinquents  for  crimes 
and  offenses  cognizable  under  the  authority  of  the  United  States. 
Notwithstanding  this  fact,  however,  he  was  and  always  had  been 
willing  to  give  the  proper  officers  of  the  Government  full  and 
prompt  information  of  all  criminal  violations  of  the  banking  laws 
that  came  to  his  knowledge,  and  to  do  everything  in  his  power  to 
further  their  efforts  to  secure  the  punishment  of  offenders  against 
the  laws,  but  that  he  did  not  consider  that  he  was  charged  with 
the  duties  and  responsibilities  of  a  public  prosecutor,  and  that 
this  view  of  the  matter  always  had  been  the  position  of  the 
Bureau. 

After  answering  the  accusations  against  himself  and  the  ad- 
ministration of  his  office,  Mr.  Knox  calls  attention  to  what  he 
termed  some  peculiar  and  noticeable  features  in  the  conduct  of 
the  United  States  Attorney  in  connection  with  the  prosecution 
of  the  officers  of  this  bank,  which,  he  stated,  explains  the  motive 
of  his  bitter  and  malicious  attack  upon  him. 

He  stated  that  within  six  months  after  the  failure  of  the 
bank,  the  receiver  communicated  to  the  United  States  Attorney 
all  the  information  of  which  he  had  knowledge,  of  the  causes  which 


102  ROMANCE  AND  TRAGEDY  OF  BANKING 

led  to  the  failure,  but  that  the  latter  took  no  steps  toward  insti- 
tuting official  inquiry  into  the  management  of  the  bank  or  the 
punishment  of  the  delinquent  officers  and  directors.  When  the 
grand  jury,  more  than  a  year  after  the  failure,  took  the  initiative 
and  demanded  that  the  receiver  of  the  bank  should  be  required  to 
appear  before  it,  the  United  States  Attorney  steadily  opposed 
this  demand  on  the  ground  that  the  grand  jury  had  no  right  to 
demand  the  presence  of  any  witnesses  except  upon  the  direction 
of  the  United  States  Attorney,  and  that  he  had  no  knowledge 
of  the  commission  of  any  crime  in  relation  to  the  management  of 
the  bank,  as  the  receiver  had  not  appeared  before  him  and  made 
complaint  under  oath.  It  was  not,  Mr.  Knox  stated,  until  the 
grand  jury  made  complaint  in  open  court  of  their  inability  to 
obtain  the  attendance  of  witnesses  they  wished  to  examine  that 
the  inquest  was  begun. 

Although  the  conduct  of  all  of  the  directors  in  the  manage- 
ment of  the  bank  must  have  become  known  to  the  grand  jury  in 
the  course  of  their  prolonged  investigation,  Mr.  Knox  said,  in- 
dictments were  found  only  against  the  former  president,  vice- 
president  and  cashier  for  declaring  unearned  dividends,  for  pur- 
chasing the  stock  of  the  bank,  and  for  making  false  reports,  but 
no  indictments  were  found  for  wilful  misapplication  of  the  funds 
of  the  bank  in  the  disposition  of  the  immense  sums  of  money  which 
were  lost  by  the  action  of  the  directors.  Nor  were  any  indict- 
ments found  against  any  of  the  other  directors,  although  it  was 
not  reasonable  to  suppose  that  the  three  indicted  officers  were 
alone  responsible  for  the  purchase  of  the  stock  of  the  bank.  Mr. 
Knox,  therefore,  expressed  the  conclusion  that  either  the  grand 
jury  dismissed  tlie  case  from  consideration  on  their  own  motion, 
or  did  so  on  the  advice  or  influence  of  the  United  States  Attorney. 

Mr.  Knox  concluded  his  report  to  Secretary  Sherman  by  ex- 
pressing the  conviction  that  the  purpose  of  the  United  States 
Attorney  in  making  false  and  groundless  charges  against  him 
was  to  divert  attention  from  his  own  gross  negligence  and  omis- 
sions of  duty,  and  to  conceal  the  partiality  and  inefficiency  of 
official  conduct,  in  order  to  prepare  the  public  mind  in  advance 
for  the  probable  failure  of  the  prosecutions  because  of  some 
weakness  in  the  testimony  or  defect  in  the  indictments. 


ROMANCE  AND  TRAGEDY  OF  BANKING  103 

But,  be  that  as  it  may,  the  most  remarkable  feature  of  this 
strange  and  eventful  story  is  the  fact  that  a  pool  of  seven  men 
could  borrow  a  million  dollars  from  a  bank  in  the  name  of  another 
bank  with  which  they  had  no  official  connection,  and  through  the 
means  of  a  credit  thus  obtained  secure  a  controlling  interest  in 
the  stock  of  that  bank,  elect  themselves  its  sole  directors,  then 
repay  the  loan  from  the  funds  of  the  institution  and  escape  lia- 
bility for  misapplication  of  such  funds.  It  is  simply  incompre- 
hensible. 

To  what  extent  the  practice  prevailed  in  the  Currency  Bureau, 
if  at  all,  when  Mr.  Knox  was  Comptroller,  in  regard  to  with- 
holding from  the  United  States  Attorney  information  of  crimi- 
nal violations  of  law  on  the  part  of  bank  officers  until  efforts 
were  first  exhausted  to  recover  from  the  accused  any  funds  of 
the  bank  for  which  they  were  liable,  is  not  apparent.  But  such 
was  not  the  practice  in  later  years. 

Bank  examiners  under  their  general  instructions  were  directed 
to  immediately  report  in  writing  to  the  United  States  Attorney 
all  criminal  violations  of  law  on  the  part  of  bank  officers  or  em- 
ployees that  came  to  their  knowledge,  and  to  forward  a  copy  of 
such  report,  in  duplicate,  to  the  Comptroller,  one  copy  for  the 
files  of  the  office  and  the  other  for  the  Department  of  Justice,  so 
that  the  Attorney  General  might  have  knowledge  of  the  complaint 
and  see  that  the  United  States  Attorney,  to  whom  the  complaint 
was  made,  took  prompt  and  proper  action. 

The  Failure  of  the  'First  National  Bank  of  Washington,  D.  C. 

The  First  National  Bank  of  Washington,  D.  C,  was  char- 
tered July  16, 1863,  with  an  authorized  capital  stock  of  $500,000. 
The  principal  stockholders  were  members  of  the  firm  of  Jay  Cooke 
&  Company,  of  Philadelphia,  Pa.,  who  continued  to  control  the 
bank  to  the  date  of  its  failure.  Henry  D.  Cooke,  of  Georgetown, 
D.  C,  the  first  Governor  of  the  District  of  Columbia  when  the 
district  was  under  territorial  form  of  government,  was  president 
of  the  bank.  At  the  date  of  its  failure,  September  19,  1872,  the 
liabilities,  exclusive  of  capital  stock  and  circulation,  amounted  to 
$1,619,968.     An  assessment  was  levied  upon  the  stockholders  for 


104  ROMANCE  AND  TRAGEDY  OF  BANKING 

sixty  per  cent.,  or  $300,000,  but  only  $5200  was  collected  from 
this  source.  The  receiver  collected  from  the  assets  $1 ,447,1 03. 
This,  together  with  the  amount  realized  from  collateral  in  the 
hands  of  creditors,  and  from  the  assessment  on  the  shareholders, 
enabled  him  to  pay  one  hundred  per  cent,  of  the  claims  proved. 
The  receivership  was  finally  closed  January  24,  1876. 

The  failure  of  this  bank  was  the  subject  of  a  Congressional 
investigation,  under  authority  of  a  resolution  adopted  by  the 
House  of  Representatives  on  February  10,  1874,  a  full  report  of 
which  was  made  by  the  Committee  on  Banking  and  Currency 
during  the  first  session  of  the  Forty-third  Congress. 

From  the  report  of  the  committee  it  appears  that  this  bank 
had  been  a  depositary  of  public  moneys,  and  was  largely  employed 
at  times  as  the  financial  agent  of  the  government,  acting  in  that 
capacity  in  the  conversion  of  the  seven-thirty  bonds  and  in  the 
negotiations  and  funding  of  various  Government  loans  in  connec- 
tion with  the  several  syndicates  formed  for  that  purpose.  The 
bank's  financial  transactions  as  fiscal  agent  for  the  Government 
were  of  great  magnitude,  and  large  profits  were  supposed  to  have 
been  realized  from  its  dealings  in  United  States  securities  of  all 
kinds. 

Another  special  feature  of  this  bank's  business  was  the  con- 
version of  mutilated  currency  for  other  national  banks  and 
bankers  of  the  country,  and  acting  as  agent  for  the  redemption 
of  the  notes  of  such  national  banks  as  kept  a  redemption  account 
with  this  association.  At  the  time  of  the  failure  of  the  bank,  this 
redemption  fund  amounted  to  $750,000. 

The  redemption  feature  of  the  bank's  business  grew  from 
small  beginnings  to  great  proportions,  but  through  lack  of  proper 
system  in  the  management  of  this  branch  of  the  business  the 
greatest  carelessness  and  looseness  in  methods  prevailed.  After 
the  failure  of  the  bank  an  investigation  showed  that  no  adequate 
checks  were  established  to  insure  correctness  and  accuracy.  It 
appeared  that  the  mutilated  currency  did  not  enter  into  the  gen- 
eral cash  account  of  the  bank,  but  was  kept  separate  and  apart 
and  under  the  special  control  of  a  corps  of  clerks.  No  record 
was  found  of  any  cash  settlements  having  been  made  in  this  de- 
partment of  the  bank's  business  to  prove  the  accuracy  of  the 


ROIVIANCE  AND  TRAGEDY  OF  BANKING  105 

account,  or  to  verify  the  amount  of  currency  on  hand.  The  books 
of  this  department  were  simply  memoranda.  When  mutilated  cur- 
rency was  received,  it  was  entered  on  the  memorandum  books,  and 
from  this  record  remittances  were  made.  When  amounts  were 
remitted  for,  the  drafts  were  credited  in  the  general  books  to  the 
banks  on  which  they  were  drawn  and  a  debit  in  biilk  was  made  to 
an  account  denominated  "Mutilated  Currency."  A  large  amount 
of  currency  received  was  circulation  of  banks  which  kept  no  re- 
demption deposit  with  this  bank,  and  which  it  was  necessary  to 
assort  and  send  in  round  sums  to  the  cities  where  such  notes  were 
redeemable,  for  collection  and  returns.  Such  currency  when  sent 
was  debited  to  the  banks  to  which  it  was  sent  and  credited  in  bulk 
to  "Mutilated  Currency"  account.  The  notes  of  banks  which  kept 
a  redemption  deposit  with  this  banlc  were  assorted  and  held  until 
an  accumulation  of  five  hundred  dollars  or  more  was  received, 
when  these  notes  were  sent  to  the  Comptroller  of  the  Currency 
for  cancellation  and  destruction. 

At  that  time  the  notes  were  destroyed  by  burning  instead  of 
by  maceration  as  now.  Large  amounts  of  these  notes  were  sent 
over  to  the  Comptroller's  office  daily.  This  bank  was  located  on 
Fifteenth  Street,  opposite  the  Treasury  Department,  in  the  build- 
ing subsequently  occupied  by  the  Citizens  National  Bank,  which 
bank,  on  November  7,  1904,  was  placed  in  voluntary  liquidation 
and  merged  with  the  National  Metropolitan  Bank  next  door  and 
subsequently  the  building  was  demolished  to  make  room  for  the 
theatre  and  office  building  which  now  occupies  the  site.  These 
notes  were  debited  to  "Burning  Account,"  and  credited  to  "Muti- 
lated Currency  Account"  on  the  books  of  the  bank. 

The  Comptroller  of  the  Currency  issued  to  the  First  National 
Bank  certicates  of  burning  for  such  notes,  which  certificates  were 
sent  by  the  bank  to  the  banks  issuing  the  notes,  with  request  for 
remittance  of  an  equal  amount  of  currency  to  make  good  the 
deficit  in  their  redemption  deposit  fund.  But  instead  of  these 
amounts  being  debited  to  such  fund,  they  were  debited  to  "Burn- 
ing Account,"  thus  leaving  the  balance  to  the  debit  of  that 
account  to  represent  the  amounts  due  from  banks  for  currency 
redeemed  and  destroyed  for  their  account. 


106    ROMANCE  AND  TRAGEDY  OF  BANKING 

It  was  stipulated  on  the  part  of  the  First  National  Bank  that 
returns  for  mutilated  currency  should  be  made  on  the  day  follow- 
ing the  receipt  of  the  currency,  but  the  practice  had  been  to  remit 
in  from  one  to  five  days  after  receipt,  and  for  longer  periods  by 
special  agreement.  In  consequence,  a  large  amount  of  currency 
was  always  on  hand  in  the  First  National  Bank  not  shown  on  its 
general  books,  and  at  the  time  of  the  failure  of  the  bank  the  ac- 
cumulation of  such  currency  amounted  to  $340,000.  At  the  same 
time  $97,000  had  been  sent  to  the  Comptroller  of  the  Currency 
for  burning  without  entry  on  the  books  of  the  bank. 

On  account  of  the  loose  method  of  handling  this  business,  when 
the  accounts  of  the  bank  were  made  up  after  failure,  a  deficit  was 
discovered  of  about  $40,398,  which  never  was  reconciled.  It  was 
afterward  stated  by  some  of  the  employees  of  the  bank,  who  knew 
of  the  criminal  carelessness  in  connection  with  the  conduct  of  this 
branch  of  the  bank's  business,  that  it  was  an  easy  matter  for  any 
employee  to  help  himself  to  some  of  this  money  at  any  time  with- 
out fear  of  discovery. 

The  Treasury  Department  also  seemed  to  be  as  lax  in  its 
methods  of  dealing  with  this  bank  as  the  bank  was  in  handling  its 
redemption  accounts.  At  the  time  of  the  failure,  the  bank  was 
largely  indebted  to  the  Government  over  and  above  the  amount 
of  the  bonds  which  the  Government  held  to  secure  such  indebted- 
ness. 

It  appears  that  as  a  designated  depositary  of  the  Govern- 
ment, the  bank  issued  its  certificates  in  favor  of  the  Treasurer 
of  the  United  States  for  fractional  currency  to  be  forwarded  to 
different  banks  and  bankers  throughout  the  country  which  made 
their  orders  through  this  bank.  In  the  natural  course  of  business, 
such  certificates  would  not  be  very  large  and  the  balance  in  bank 
would  be  kept  down  to  a  proper  amount  by  transfer  orders  made 
as  soon  as  the  weekly  transcripts  or  reports  of  the  bank  received 
at  the  Treasury  Department  could  be  examined. 

At  the  date  of  failure,  the  bank  was  indebted  to  the  Govern- 
ment to  the  amount  of  $287,782.  Of  this  amount  $125,000  was 
for  certificates  issued  during  the  week  preceding  the  failure,  for 
fractional  currency  shipped  Jay  Cooke  &  Company,  of  Phila- 
delphia, Pa. 


ROMANCE  AND  TRAGEDY  OF  BANKING  107 

At  the  time  these  large  sums  were  forwarded  by  the  Treasury 
Department,  on  the  strength  of  the  certificates  of  this  bank,  the 
bank  was  already  indebted  to  the  Government  for  a  sum  larger 
than  the  amount  of  its  securities  on  deposit  with  the  Treasurer 
of  the  United  States.  The  transaction  with  Jay  Cooke  &  Com- 
pany amounted  simply  to  that  company  obtaining  a  large  loan 
from  the  Government  upon  the  security  of  the  certificates  of  the 
First  National  Bank,  and  the  fact  that  the  company  was  able 
to  do  this  was  due  to  the  laxity  in  methods  on  the  part  of  the 
Treasury  Department,  in  accepting  the  bank's  certificates  instead 
of  money  in  settlement  of  redemptions  of  national  bank  notes. 

Fortunately,  however,  the  Government  was  saved  from  loss  at 
the  time  of  the  failure  of  the  bank  by  the  prompt  action  of  the 
Secretary  of  the  Treasury  in  obtaining  satisfactory  guarantees 
and  securities  for  any  deficiency  that  might  arise  in  the  payment 
of  the  bank's  debts  from  the  assets  of  the  failed  association,  and 
new  regulations  were  put  in  force  in  the  Department  to  guard 
against  any  like  conditions  occurring  in  the  future  by  fully  pro- 
tecting the  interests  of  the  Government  in  its  dealings  with  deposi- 
tary banks. 

The  firm  of  Jay  Cooke  &  Company,  which  failed  at  the  same 
time  that  the  bank  failed,  seemed  to  have  freely  used  the  funds  of 
the  First  National  Bank  to  help  it  in  its  embarrassment,  and  at 
the  date  of  failure  the  firm  owed  the  bank,  directly  and  indirectly, 
nearly  nine  hundred  thousand  dollars. 

Inadequacies  of  the  Law  and  Recommendations  for  Amendments 

As  heretofore  stated.  Comptrollers  in  the  earlier  years  of  the 
Currency  Bureau  were  less  disposed  than  some  of  those  of  later 
years  to  supply  deficiencies  in  the  statutes  by  administrative  reg- 
ulations for  the  correction  of  abuses  and  unsatisfactory  condi- 
tions found  to  exist  in  banks,  but  were  more  inclined  to  recommend 
to  Congress  legislation  which  in  their  judgment  was  deemed  neces- 
sary to  enable  them  to  correct  and  control  such  conditions. 

In  line  with  this  policy,  Mr.  Knox  in  his  several  annual  reports 
called  the  attention  of  Congress  to  a  number  of  objectionable  and 
unsafe  practices  indulged  in  by  banks,  for  which  the  law  provided 


108  KOMANCE  AND  TRAGEDY  OF  BANKING 

no  adequate  remedy,  and  recommended  the  legislation  necessary 
in  his  judgment  to  correct  such  evils. 

The  most  important  amendments  to  the  law  suggested  by  Mr. 
Knox,  and  the  reasons  therefor,  are  the  following: 

Shortly  after  the  Civil  War  some  of  the  Southern  States 
issued  certificates  in  the  form  of  banknotes,  receivable  in  payment 
for  all  debts  due  the  State  issuing  them.  It  was  claimed  that 
under  an  opinion  rendered  by  the  Attorney  General  of  the  United 
States,  such  certificates  were  not  subject  to  the  tax  of  ten  per 
cent,  on  State  bank  circulation  imposed  by  the  Act  of  March  3, 
1865. 

Mr.  Knox  disputed  the  right  of  a  State  to  issue  such  certifi- 
cates, claiming  that  the  Constitution  of  the  United  States  pro- 
hibited any  State  from  emitting  bills  of  credit,  and  that  the  Su- 
preme Court  of  the  United  States  had  held  that  a  note  of  circula- 
tion issued  by  a  State  on  the  credit  of  the  State,  was  a  bill  of 
credit,  and  therefore  was  prohibited  by  the  Constitution. 

It  also  appears  that  savings  banks,  railroad,  municipal  and 
other  corporations  in  some  of  the  Southern  States  issued  a  large 
amount  of  similar  certificates.  To  meet  this  situation,  Mr.  Knox 
recommended  an  amendment  to  the  Act  of  July  17,  1862,  which 
makes  it  a  penal  offense  "to  make,  issue,  circulate,  or  pay  any 
note,  check,  memorandum,  token  or  other  obligation  for  a  less  sum 
than  one  dollar,  intended  to  circulate  as  money,  or  to  be  received 
or  used  in  lieu  of  money,"  so  as  to  prohibit  absolutely  the  issue 
of  such  circulation,  and  thus  prevent  ultimate  loss  to  the  people 
among  whom  such  notes  were  then  obtaining  extensive  credit. 

This  provision  of  law  was  brought  prominently  into  notice  by 
its  re-enactment  in  the  codification  of  the  criminal  statutes  of  the 
United  States,  approved  March  4,  1909,  and  gave  rise  to  the  im- 
pression that  it  was  new  legislation,  and  that  an  ordinary  bank 
check  issued  in  payment  for  a  sum  of  money  less  than  one  dollar 
was  prohibited  by  this  Act.  The  Treasury  Department,  in  reply 
to  numerous  inquiries  on  the  subject,  advised  correspondents  that 
it  had  always  been  held  by  the  department  that  this  law  did  not 
apply  to  bank  checks,  for  the  reason  that  a  bank  check  is  an  order 
on  a  banker  to  pay  a  particular  sum  of  money  and  is  not  designed 
to  circulate  as  a  substitute  for  money,  and  therefore  the  issuing 


ROIVIANCE  AND  TRAGEDY  OF  BANKING  109 

of  checks  for  any  amount,  however  small,  was  not  in  conflict  with 
this  statute. 

Mr.  Knox  also  recommended  that  all  officers  of  national  banks 
and  of  Government  depositaries  be  required  to  stamp  the  word 
"Counterfeit"  or  "Illegal"  upon  all  counterfeit  and  unauthorized 
issues  presented  at  their  counters. 

In  connection  with  the  assets  of  insolvent  banks  Mr.  Knox 
recommended  that  the  Comptroller  be  required  to  return  to  an 
agent  of  the  stockholders  of  failed  banks  all  remaining  assets 
after  the  depositors  and  other  creditors  had  been  paid  in  full. 

When  the  declaration  of  a  dividend  to  the  creditors  of  a  failed 
bank  is  delayed  by  protracted  litigation  or  some  other  unavoid- 
able cause,  as  is  frequently  the  case,  he  recommended  that  pro- 
vision be  made  for  the  investment  of  such  funds  of  the  bank  on 
deposit  with  the  Treasurer  of  the  United  States,  in  interest- 
bearing  securities  for  the  time  being. 

As  a  means  of  regulating  and  controlling  the  interest  rates 
paid  by  banks  on  deposits,  he  recommended  the  repeal  of  the  then 
existing  law  imposing  a  tax  of  one-half  of  one  per  cent,  on  all 
deposits  and  the  substitution  of  a  provision  imposing  a  tax  on 
individual  and  bank  deposits  placed  with  banks  or  bankers  under 
an  agreement  or  understanding,  or  with  the  expectation  that 
interest  would  be  paid  thereon.  Such  legislation,  he  claimed,  if 
rigidly  enforced,  would  have  the  effect  of  not  onl}^  reducing  the 
interest  rate  paid  on  deposits  but  would  tend  to  discourage  the 
illegitimate  organization  of  banks.  It  would  also  have  the 
tendency  to  check  competition  for  deposits  through  the  induce- 
ment offered  by  high  interest  rates. 

In  connection  with  the  provision  of  law  authorizing  the  insti- 
tution of  a  suit  to  forfeit  the  charter  of  a  bank  for  violations  of 
law,  he  called  the  attention  of  Congress  to  the  fact  that  there  was 
no  means  provided  for  the  appointment  of  a  receiver  for  such  an 
institution  after  its  charter  had  been  adjudged  forfeited  by  the 
court.  This  deficiency  in  the  statute  continues  to  exist,  and  there 
is  a  possibility  of  a  question  of  jurisdiction  being  raised  sometime 
between  the  court  and  the  Comptroller  as  to  which  has  the  right 
in  such  a  case  to  make  the  appointment.  It  always  has  been  held 
by  the  Comptroller's  office  that  in  such  a  case  the  Comptroller 


110  ROMANCE  AND  TRAGEDY  OF  BANKING 

would  have  authority  to  appoint  the  receiver  under  the  decree  of 
the  court  declaring  the  charter  of  the  bank  forfeited,  but  the 
court  might  dispute  this  right  and  make  the  appointment  himself, 
in  which  case  the  Comptroller  might  decline  to  recognize  the 
receiver  so  appointed,  as  was  done  in  one  case  of  a  receiver  ap- 
pointed by  the  court  on  petition  of  some  of  the  creditors  of  the 
bank,  and  thus  create  a  complication. 

The  Comptroller  recommended  that  deposits  of  one  bank  with 
another  bank  or  banker,  except  national  banks,  be  restricted  to 
the  limit  on  loans.  Subsequent  Comptrollers  held  that  balances 
with  banks  and  bankers  other  than  national  banks  were  loans  sub- 
ject to  the  limit,  but  in  later  years  that  ruling  was  modified,  to 
hold  that  the  limitation  applies  only  to  actual  deposits  with  other 
banking  institutions  and  not  to  balances  subject  to  check,  or  with- 
drawal on  demand.  The  Federal  Reserve  Act,  however,  restricted 
all  balances  with  non-member  banks  to  ten  per  centum  of  the  mem- 
ber bank's  capital  and  surplus. 

The  Act  of  June  30,  1874,  making  appropriations  for  sundry 
civil  expenses  of  the  Government,  contained  a  provision  requiring 
the  banks  to  reimburse  the  Treasury  Department  the  cost  for 
replacing  worn  and  mutilated  circulating  notes.  Mr.  Knox  rec- 
ommended the  repeal  of  this  provision  and  that  such  cost  should 
be  paid  from  the  tax  collected  from  the  banks  on  their  circulation, 
for  the  reason,  he  said,  that  the  Government  receives  the  benefit 
of  all  lost  and  worn-out  circulation  not  finally  returned  for  re- 
demption, and  the  amount  realized  from  this  source  being  far 
greater  than  the  amount  expended  in  the  replacing  of  the  worn- 
out  notes. 

The  corporate  existence  of  the  first  bank  organized  under  the 
national  system  expired  January  1,  1882.  The  expiration  of 
other  associations  followed  in  the  order  of  their  organization. 
To  provide  for  the  continuance  of  such  banks  as  desired  to  remain 
in  the  system,  Mr.  Knox  recommended  an  amendment  to  the  law 
authorizing  such  expiring  banks  to  amend  their  articles  of  asso- 
ciation to  provide  for  an  extension  of  their  corporate  existence 
for  a  further  period  of  twenty  years,  by  the  votes  of  shareholders 
owning  not  less  than  two-thirds  of  the  capital  stock  and  with  the 
approval  of  the  Comptroller  of  the  Currency. 


ROMANCE  AND  TRAGEDY  OF  BANKING  111 

In  the  absence  of  such  an  amendment  to  the  law  it  would  have 
been  necessary  for  every  national  bank  desiring  to  continue  in 
business  to  have  secured  a  special  Act  of  Congress,  or  to  have 
reorganized  as  a  new  association  under  a  new  title.  There  was 
some  question  raised  at  the  time  as  to  the  right  of  shareholders 
of  a  bank  whose  corporate  existence  had  expired  to  organize  a 
new  association  with  the  same  name  as  the  expiring  association, 
and  this  question  was  referred  to  the  Department  of  Justice  for 
determination.  The  Attorney  General,  in  an  opinion  rendered 
February  23,  1882,  held  that  there  was  no  legal  objection  to  the 
stockholders  of  an  expiring  association  organizing  a  new  associa- 
tion, nor  from  assuming  the  name  of  the  old  corporation,  with 
the  approval  of  the  Comptroller  of  the  Currency. 

Mr.  Knox  was  very  insistent  upon  the  enactment  of  a  law 
requiring  the  circulation  of  national  banks  to  bear  the  written 
signatures  of  at  least  one  of  the  officers  of  the  issuing  bank,  and 
he  deemed  this  to  be  a  matter  of  so  much  importance  that  he  pre- 
pared and  had  introduced  in  Congress  a  bill  providing  a  penalty 
upon  any  engraver  or  lithographer  who  should  print  the  signa- 
ture of  a  bank  officer  upon  any  national  bank  note. 

While  the  law  requires  the  circulating  notes  of  a  bank  to  bear 
the  signature  of  the  president,  or  vic.e-president  and  cashier  of 
the  association  issuing  the  notes,  and  contemplated  that  such  sig- 
natures should  be  written  on  the  notes,  it  also  provides  for  the 
redemption  of  the  notes  by  the  bank,  whether  signed  or  not,  or 
whether  the  signatures  thereon  are  other  than  those  of  the  officers 
indicated,  or  forgeries. 

It  is  immaterial,  therefore,  whether  the  signatures  are  written, 
stamped  or  engraved,  as  far  as  the  redemption  of  the  notes  is  con- 
cerned, and  while  there  was  no  authority  in  law  for  the  engraving 
of  the  signatures  on  the  plates  from  which  the  notes  were  printed 
until  March  3,  1919,  when  the  law  was  amended  to  authorize 
engraved  signatures,  many  banks  sent  their  notes  to  an  engraving 
company  for  completion  in  this  respect,  or  stamped  the  fac-simile 
signatures  of  the  officers  of  the  bank  thereon.  All  the  law  re- 
quires in  this  connection  is  that  the  signatures  appearing  on  the 
notes,  whether  written,  stamped  or  engraved,  shall  be  those  of 
the  president,  or  vice-president  and  cashier. 


112  ROMANCE  AND  TRAGEDY  OF  BANKING 

A  number  of  the  amendments  recommended  by  Mr.  Knox  were 
enacted  into  law  before  he  retired  from  office,  and  others  were 
adopted  later,  with  some  modifications. 

The  National  Bank  Act  was  nearly  ten  years  old  when  Mr. 
Knox  assumed  charge  of  the  Currency  Bureau,  and  between  that 
date  and  the  date  he  retired  from  the  service,  twenty-one  amend- 
ments to  the  law  were  passed,  principally  among  which  were  the 
following : 


'& 


Amendments  to  the  Law 

Act  of  June  8,  1872 :  Authorizing  the  Secretary  of  the 
Treasury  to  receive  United  States  notes  on  deposit  from  national 
banking  associations  in  sums  of  not  less  than  ten  thousand  dol- 
lars, and  to  issue  certificates  therefor  in  denominations  of  not  less 
than  five  thousand  dollars,  which  certificates  were  authorized  to 
be  counted  as  reserve,  but  drew  no  interest. 

Act  of  February  19,  1873 :  Requiring  the  publication  of  sta- 
tistical information  in  the  Comptroller's  annual  report  in  regard 
to  State  banks. 

Act  of  March  3,  1873 :  Prohibiting  the  use  of  the  word  "Na- 
tional" by  any  banking  institution  other  than  a  national  bank, 
as  part  of  its  title,  and  prescribing  a  penalty  of  fifty  dollars  a 
day  for  violation  of  this  provision. 

Act  of  March  3,  1873:  Providing  for  an  assessment  of  stock- 
holders to  make  good  an  impairment  of  the  capital  stock  of  a 
bank. 

Act  of  June  20,  1874 :  Fixing  the  maximum  amount  of  United 
States  notes  and  providing  for  a  redistribution  of  national  bank 
circulation. 

Act  of  June  23,  1874:  Requiring  the  destruction  of  United 
States  and  national  bank  notes  by  maceration  instead  of  by 
burning. 

Act  of  June  23,  1874:  Providing  for  a  two-cent  tax  on  bank 
checks. 

Act  of  January  14,  1875 :  Abolishing  the  limit  on  the  aggre- 
gate amount   of  national  bank  circulation.      This  Act   repealed 


ROMANCE  AND  TRAGEDY  OF  BANKING  113 

Section  5177  of  the  Revised  Statutes  of  the  United  States,  and 
authorized  an  increase  of  circulation  by  each  association  without 
regard  to  the  aggregate  amount  outstanding  of  all  the  banks,  and 
removed  the  restriction  as  to  the  apportionment  of  circulation 
among  the  States  and  Territories. 

Act  of  January  19,  1875 :  Authorizing  the  formation  of 
national  gold  banks,  to  issue  circulation  redeemable  in  gold  coin 
of  the  United  States. 

Act  of  February  18,  1875:  Correcting  certain  errors  and 
omissions  in  the  Revised  Statutes  of  the  United  States. 

Act  of  February  19,  1875 :  Amending  the  Act  of  June  3, 
1864,  in  regard  to  the  appointment  of  national  bank  examiners 
and  the  method  of  compensation. 

Act  of  March  3,  1875 :  Providing  for  the  printing  of  national 
bank  notes  on  distinctive  paper. 

Act  of  March  3,  1875:  Providing  for  a  clerical  force  for  the 
redemption  of  national  bank  notes,  and  requiring  the  banks  to 
reimburse  the  Treasury  Department  annually  the  amount  ex- 
pended in  the  maintenance  of  such  force. 

Act  of  June  30,  1876 :  Providing  for  the  appointment  of  re- 
ceivers for  national  banks  under  certain  conditions. 

Act  of  February  27,  1877 :  Amending  the  Act  of  March  8, 
1873,  providing  for  an  annual  examination  of  the  plates,  dies, 
bed  pieces,  etc.,  from  which  national  bank  notes  are  printed. 

Act  of  February  27,  1877:  Amending  the  Act  of  June  3, 
1864,  requiring  not  less  than  five  reports  of  condition  to  be  made 
by  the  banks  upon  call  of  the  Comptroller  of  the  Currency. 

Act  of  February  27,  1877:  Amending  the  Act  of  June  3, 
1864,  relative  to  the  manner  in  which  redeemed  notes  shall  be 
destroyed. 

Act  of  March  1,  1879:  Abatement  of  the  semi-annual  duty 
on  circulation  of  insolvent  national  banks. 

Act  of  February  14,  1880:  Authorizing  the  conversion  of 
national  gold  banks  into  currency  associations. 

Act  of  February  26,  1881 :  Authorizing  reports  of  condition 
and  dividend  and  earnings  reports  of  the  bank  to  be  verified  before 


114  ROIVIANCE  AND  TRAGEDY  OF  BANKING 

a  notary  public,  or  any  other  officer  having  an  official  seal,  auth- 
orized to  administer  oaths. 

Act  of  July  12,  1882:  Authorizing  the  extension  of  the  cor- 
porate existence  of  national  banks. 

Act  of  July  12,  1882:  Authorizing  the  issue  of  gold  certifi- 
cates in  exchange  for  gold  coin. 

Act  of  July  12,  1882:  Providing  a  penalty  for  falsely  certi- 
fying checks. 

Act  of  March  3,  1883:  Repealing  the  tax  on  capital  and 
deposits. 


HENRY  W.  CANNON 
Comptroller  of  the  Currency,  1884- 1886 


CHAPTER  VII 

Henry  W.  Cannon 

HENRY  W.  CANNON,  the  fifth  Comptroller  of  the  Cur- 
rency, was  born  at  Delhi,  N.  Y.,  in  1850.  He  was 
educated  in  the  private  schools  at  Delhi  and  at  the 
Delaware  Literary  Institute.  After  serving  as  a  clerk  in  his 
early  youth,  he  became  teller  of  the  First  National  Bank  of 
Delhi,  and  later  went  to  Minnesota  to  accept  a  position  in  the 
Second  National  Bank  of  St.  Paul.  In  1871,  he  removed  to 
Stillwater,  Minn.,  and  assisted  in  the  organization  of  the 
Lumberman's  National  Bank  of  that  place,  of  which  he  was 
cashier.  He  remained  connected  with  this  institution  for  fifteen 
years.  During  the  same  period  he  was  Secretary  of  the  Chamber 
of  Commerce,  Treasurer  of  the  Water  and  Gas  Companies  of 
Stillwater,  and  was  active  in  the  municipal  affairs  of  Stillwater 
and  other  public  movements.  On  May  12,  1884,  he  was  appointed 
Comptroller  of  the  Currency,  to  succeed  John  Jay  Knox,  and 
served  until  February  2,  1886,  when  he  resigned  to  accept  the 
vice-presidency  of  the  National  Bank  of  the  Republic  of  New 
York  City,  of  which  institution  Mr.  Knox  was  president.  This 
bank  was  organized  in  1850  as  a  State  institution  and  became  a 
national  association  by  conversion  in  1865.  He  remained  with 
this  bank  until  October  30,  1886,  when  he  was  elected  president 
of  the  Chase  National  Bank  of  New  York,  to  succeed  John 
Thompson.  He  continued  as  president  of  this  institution  until 
February,  1904,  when  he  was  succeeded  by  A.  Barton  Hepburn. 

Mr.  Cannon's  term  as  Comptroller  covered  a  period  of  only 
twenty-one  months,  and  while  his  retirement  was  entirely  volun- 
tary, his  administration  was  prematurely  brought  to  a  close  by 
the  election  of  Grover  Cleveland  to  the  Presidency  of  the  United 
States  and  the  party  changes  incident  to  a  new  administration  of 
the  Federal  Government. 

115 


116  ROMANCE  AND  TRAGEDY  OF  BANKING 

Panic  of  188 4 

Immediately  following  Mr.  Cannon's  appointment  as  Comp- 
troller he  was  confronted  with  the  financial  panic  of  1884,  This 
disturbance  did  not  really  amount  to  a  panic,  as  it  was  confined 
almost  wholly  to  New  York  City,  and  was  the  result  of  too  close 
an  intimacy  of  some  of  the  New  York  City  banks  with  Stock 
Exchange  transactions. 

During  the  greater  part  of  1883  there  had  been  a  gradual  but 
general  decline  in  values.  Liquidation  had  been  quietly  but  stead- 
ily going  on  for  several  months,  with  a  marked  shrinkage  in  the 
prices  of  commodities  in  general  and  a  curtailment  in  production. 
In  consequence  a  number  of  mercantile  concerns  were  forced  to 
suspend  during  the  latter  part  of  1883,  followed  early  in  1884 
by  the  appointment  of  receivers  for  the  New  York  &  New  Eng- 
land Railroad  Company  and  the  North  River  Construction  Com- 
pany. The  Oregon  and  Trans-Continental  Company,  of  which 
Henry  Villard  was  president,  became  seriously  involved.  This 
com.pany  was  formed  for  the  purpose  of  acquiring  a  controlling 
interest  in  the  stocks  of  the  Northern  Pacific  and  Oregon  Railway 
&  Navigation  Companies. 

During  the  months  of  February,  March  and  April,  1884, 
numerous  commercial  failures  occurred  in  New  York  City,  fol- 
lowed by  a  further  decline  in  stocks  and  bonds  of  all  kinds.  On 
May  6,  1884,  the  Marine  National  Bank  of  New  York  closed  its 
doors,  and  as  a  result  the  brokerage  firm  of  Grant  &  Ward,  with 
which  General  Ulysses  S.  Grant  was  connected,  suspended  on 
May  8.  The  liabilities  of  this  firm  were  over  $16,000,000  and  its 
assets  less  than  $7,000,000.  The  president  of  the  Marine  Na- 
tional Bank  was  also  a  partner  of  Grant  &  Ward.  The  immediate 
cause  of  the  failure  of  the  bank  was  the  over-certification  of  a 
check  of  the  firm  of  Grant  &  Ward  for  the  sum  of  $750,000. 

The  excitement  and  uneasiness  caused  by  these  failures  was 
intensified  by  the  discovery  on  May  13  that  John  C.  Eno,  the 
president  of  the  Second  National  Bank  of  New  York,  was  a  de- 
faulter to  the  extent  of  $3,185,000.  This  disclosure,  coming  at 
the  time  it  did,  when  the  financial  situation  was  under  a  severe 
tension,  had  a  further  depressing  effect  upon  the  stock  market 


ROMANCE  AND  TRAGEDY  OF  BANKING  117 

and  caused  a  still  fyrther  decline  in  stocks.  This  large  shortage, 
however,  was  immediately  made  good,  thereby  averting  the  failure 
of  the  institution. 

Criminal  proceedings  were  instituted  against  Eno  and  immedi- 
ately upon  the  discovery  of  the  defalcation  he  fled  to  Canada, 
where  he  took  refuge  in  Quebec  and  remained  there  until  1903, 
when  he  returned  to  New  York  City  and  surrendered  to  the  Fed- 
eral authorities.  He  was  admitted  to  bail  and  remained  at  liberty 
until  the  indictments  against  him  were  quashed.  In  the  meantime 
his  father,  Amos  R.  Eno,  who  was  known  as  "the  merchant 
prince"  and  reputed  to  be  a  man  of  great  wealth  and  the  owner 
of  the  Fifth  Avenue  Hotel  and  other  valuable  property  in  the 
vicinit}'  of  Madison  Square,  made  good  the  shortage  of  his  son 
to  the  bank.  In  1903,  nineteen  years  after  the  discovery  of  the 
defalcation,  the  indictments  against  Eno  were  quashed  on  the 
ground  that  it  had  not  been  shown  that  he  had  personally  profited 
by  the  use  of  the  funds  of  the  bank.  At  the  same  time  his  one 
million  interest  in  the  estate  of  his  father,  who  died  in  1908,  was 
assigned  to  W.  N.  Cromwell,  his  lawyer,  in  trust,  to  pay  his  debts. 
Nothing  more  was  heard  of  Eno  in  the  public  prints  until  Decem- 
ber, 1909,  when  he  brought  suit  against  Cromwell  for  an  account- 
ing. By  stipulation  of  counsel  a  referee  was  appointed  to  take 
the  accounting,  who  made  a  report  to  the  court  in  December, 
1911,  showing  that  Cromwell  had  fully  accounted  to  Eno  for  all 
moneys  due  him  and  that  instead  of  Cromwell  owing  him  anything, 
Eno  owed  Cromwell  over  fifty  thousand  dollars.  Eno  died  at  his 
home  in  New  Y^ork  City,  February  28,  1914,  of  pneumonia,  after 
a  brief  illness. 

On  May  14,  1884,  the  Metropolitan  National  Bank  of  New 
Y'ork  City  suspended  and  the  Northwestern  Car  Company,  con- 
trolled by  United  States  Senator  Sabin  of  Minnesota,  went  into 
the  hands  of  a  receiver.  The  Atlantic  State  Bank  of  Brooklyn, 
of  New  York,  and  the  Newark  Savings  Institution  of  Newark, 
N.  J.,  also  closed  their  doors.  The  failure  of  the  latter  institu- 
tion was  due  to  its  connection  with  the  brokerage  firm  of  Fisk  & 
Hatch,  which  suspended,  together  with  several  other  similar  con- 
cerns. Through  the  assistance  rendered  by  the  Clearing  House 
Association,  under  the  supervision  of  the  National  Bank  Exam- 


118  ROMANCE  AND  TRAGEDY  OF  BANKING 

iner,  the  Metropolitan  National  Bank  was  permitted  to  resume 
business  on  the  day  following  its  suspension.  The  temporary  sus- 
pension of  this  bank  was  the  result  of  a  run  upon  it  by  the  depos- 
itors, who  in  the  panicky  condition  of  the  public  mind  became  dis- 
trustful of  the  management  of  the  bank,  whose  president,  while 
reputed  to  be  a  man  of  considerable  means,  was  known  to  be 
identified  with  numerous  enterprises,  some  of  which  were  more  or 
less  of  a  speculative  nature. 

Public  confidence  was  so  badly  shaken  by  these  successive 
failures  that  a  great  pressure  was  made  to  sell  stocks  and  securi- 
ties of  every  kind,  and  withdrawals  of  bank  deposits  were  quite 
active  and  persistent.  Call  loans  were  difficult  to  collect,  as  bor- 
rowers could  not  obtain  money,  except  by  sacrificing  their  securi- 
ties, and  money  commanded  as  high  as  four  per  cent,  for  a  loan 
for  twenty-four  hours. 

Although  the  situation  was  exceedingly  grave  for  a  time,  the 
prompt  action  of  the  New  York  Clearing  House  Association  in 
issuing  loan  certificates  relieved  the  strain  and  contributed 
greatly  towai'd  speedily  clarifying  the  financial  atmosphere,  re- 
storing confidence,  and  checking  a  panic,  which,  but  for  such 
action,  would,  no  doubt,  have  spread  to  the  interior  banks  and 
become  general  throughout  the  country,  as  credits  in  St.  Louis 
and  Chicago  were  already  beginning  to  be  affected  by  the  dis- 
turbance. The  panic,  however,  was  confined  almost  wholly  to 
New  York  City  and  vicinity,  and  the  only  failure  of  any  impor- 
tance outside  of  New  York  City,  besides  the  Newark  Savings 
Institution,  during  the  flurry,  was  in  Pittsburgh,  and  this  was  the 
result  of  speculation  in  oil. 

Between  May  15  and  October  3,  1884,  Clearing  House  Loan 
Certificates  to  the  amount  of  $24,915,000  were  issued  by  the  New 
York  Clearing  House  Association,  the  greater  part  of  which  were 
taken  by  banks  having  large  country  bank  balances.  By  July  1 
following  all  of  these  certificates  had  been  redeemed  and  cancelled, 
except  those  that  were  issued  to  the  Metropolitan  National  Bank, 
which  bank  was  unable  to  collect  its  loans  or  to  realize  on  its 
securities  as  promptly  as  the  other  banks,  because  of  the  heavy 
withdrawal  of  deposits,  which  continued  during  this  disturbance 
And  after  it  had  practically  subsided,  necessitating  the  placing 


ROMANCE  AND  TRAGEDY  OF  BANKING  119 

of  this  institution  in  voluntary  liquidation  on  November  18,  1884, 
after  which  date  the  certificates  were  gradually  retired. 

These  certicates  were  issued  to  Clearing  House  banks  upon 
their  bills  receivable  and  securities,  at  the  rate  of  seventy-five 
cents  on  the  dollar,  and  bore  interest  at  the  rate  of  six  per  cent. 


Cause  of  the  Financial  Troubles  of  188 J^. 

In  endeavoring  to  assign  a  cause  for  the  financial  troubles  of 
1884,  Mr.  Cannon,  in  his  annual  report  to  Congress  for  that  year, 
stated  that: 

The  many  profound  students  of  political  economy  have 
for  many  years  endeavored  to  explain  the  causes  which  have 
led  to  financial  troubles  similar  to  those  of  1857,  1873  and 
1884.  *  *  *  It  is  apparent  that  a  repetition  of  the 
same  circumstances  which  brought  about  the  monetary 
crisis  of  1873  was  largely  influential  in  causing  the  crisis 
of  1884.  Property  of  all  kinds  had  been  capital- 
ized, bonds  and  stocks  had  been  issued  for  the  purpose  of 
building  railroads,  carrying  on  manufacturing  and  other 
business,  municipal  and  other  public  improvements,  and 
commercial  credit  was  extended  until  a  point  was  reached 
where  capitalists  of  this  and  other  countries  questioned 
the  intrinsic  value  of  these  securities  and  the  earning 
power  of  the  property  on  which  they  were  based.  A 
decrease  in  the  earnings  of  railroads,  manufacturing  and 
other  enterprises  followed  and  the  entire  business  of  the 
country  was   consequently  restricted   and   deadened. 

The  local  disturbance  among  the  banks,  national,  state 
and  private,  in  New  York  City  was,  as  usual, 
their  intimate  relation  in  many  instances  with  the  New 
York  Stock  Exchange,  and  the  fact  that  a  large  portion 
of  the  loans  made  by  the  banks  and  bankers  of  New  York 
were  based  upon  the  security  of  stocks  and  bonds,  often 
speculative  in  their  character,  which  were  dealt  in  and 
regularly  called  at  the  stock  board. 

Mr.  Cannon  then  proceeded  to  express  some  views  on  the  les- 
sons taught  by  this  panic,  the  relation  between  banking  and  the 


120  ROMANCE  AND  TRAGEDY  OF  BANKING 

legitimate  business  of  the  country,  and  its  influence  upon  healthy 
trade  and  commerce. 

The  principles,  he  said,  which  underlie  judicious  and  sound 
banking  are  the  growth  of  an  experience  of  many  years.  Loans 
should  be  so  made  as  not  to  exceed  a  safe  and  conservative  esti- 
mate of  the  intrinsic  value  of  the  property  represented  by  the 
securities  upon  which  they  are  based,  and  not  upon  a  fictitious 
or  inflated  valuation.  A  distinct  line  should  be  drawn  between 
legitimate  business  and  speculative  undertakings.  Doubtful  en- 
terprises should  be  discouraged  by  refusing  accommodations  to 
those  known  to  be  engaged  in  their  promotion,  even  though  the 
possibilities  of  large  profits  may  be  assured. 

The  value  of  an  exchange  for  the  convenient  handling  of 
stocks  and  securities,  he  said,  is  unquestioned,  but  when  the  mem- 
bers of  such  exchange  who  have  associated  themselves  together 
for  the  purpose  of  furthering  the  commercial  business  of  the 
country,  use  the  machinery  of  this  exchange  to  create  speculative 
values  and  to  increase  or  decrease  prices  of  stocks  and  bonds  for 
speculative  purposes,  they  engage  in  and  encourage  a  form  of 
gambling  to  the  great  detriment  of  the  legitimate  business  inter- 
ests of  the  country,  and  such  operations  should  be  prohibited  by 
either  State  or  national  legislation,  or  by  both. 

The  views  expressed  by  Mr.  Cannon  in  1884  on  this  subject 
are  unquestionably  as  wholesome  and  sound  at  the  present  time 
as  they  were  then,  and  it  would  be  well  for  the  banking  and  busi- 
ness interests  of  the  country  if  they  were  heeded.  But  the  banker 
who  heeds  such  advice  usually  does  not  need  it,  and,  unfortu- 
nately, the  one  who  needs  it  does  not  heed  it.  Too  frequently  the 
latter  is  found  to  be  himself  engaged  in  the  promotion  of  specu- 
lative undertakings  or  identified  with  doubtful  enterprises  such 
as  Mr.  Cannon  so  properly  condemned,  and  through  him  the  bank 
with  which  he  is  connected. 

As  a  rule,  bankers  are  not  inclined  to  assume  unusual  risks 
in  the  investment  of  the  funds  of  their  institution  in  speculative 
loans  for  the  sole  purpose  of  the  large  profit  that  may  inure  to 
the  bank  from  such  investments.  It  will  usually  be  found  that 
where  such  loans  or  investments  have  been  made  some  of  the 
officers  or  direct-^rs  of  the  bank  are  individually  interested  in  the 


ROIVIANCE  AND  TRAGEDY  OF  BANKING  121 

enterprise  in  which  the  funds  are  risked,  and  if  the  venture  proves 
to  be  successful,  personally  reap  the  benefit  of  the  larger  part  of 
the  profits,  but,  if  unsuccessful,  throw  the  burden  of  the  loss  upon 
the  bank. 

If  all  bankers  were  to  adopt  and  strictly  adhere  to  the  golden 
rules  laid  down  by  Mr.  Cannon  for  the  guidance  of  their  official 
conduct,  there  would  be  no  longer  any  necessity  for  "Be  it  en- 
acteds"  to  regulate  or  control  bank  management,  and  financial 
panics,  such  as  that  of  1884,  would  cease  to  occur.  But  as  long 
as  human  impulse  is  influenced  by  avarice  and  greed,  just  so  long 
w^ill  financial  disturbances,  such  as  have  been  produced  in  the  past 
from  the  causes  stated,  be  repeated  in  the  future,  unless  prevented 
by  the  remedial  legislation  suggested  by  Mr.  Cannon,  or  by  the 
enactments  of  Congress  in  later  years. 

Aside  from  the  panic  of  1884,  very  little  of  any  particular 
moment  occurred  during  the  remainder  of  Mr.  Cannon's  brief 
term  as  Comptroller. 

During  the  less  than  twenty-two  months  that  Mr.  Cannon 
held  the  office  he  made  two  reports  to  Congress.  The  first 
report  was  devoted  largely  to  a  discussion  of  the  panic  of 
1884  and  its  causes,  and  the  necessity  for  some  legislation  which 
would  make  the  issuing  of  circulation  more  profitable  to  the 
banks.  He  expressed  the  view  that  while  public  confidence  in 
national  banks  v/ould  enable  associations  organized  under  the  Act 
to  do  a  much  larger  and  more  profitable  business  than  if  organized 
under  State  laws,  it  was  possible  that  they  would  be  unwilling  to 
submit  to  the  restrictions  of  the  national  banking  laws  but  for  the 
privilege  of  issuing  circulation  under  conditions  that  would  make 
it  profitable.  Mr.  Cannon,  therefore,  seemed  to  entertain  the 
opinion  that  the  circulation  issuing  privilege  was  the  principal 
advantage  of  national  banks  over  State  institutions,  and  should 
the  profit  on  circulation  at  any  time  be  reduced  to  a  point  where 
its  issue  would  not  compensate  the  banks  for  the  inconvenience 
of  submitting  to  the  restrictions  imposed  by  the  national  banking 
laws,  many  banks  would  leave  the  system  and  reorganize  under 
State  laws,  which  were  more  liberal  in  the  powers  extended. 

While  the  original  purpose  of  the  National  Bank  Act  was  to 
create  a  market  for  United  States  bonds  by  providing  a  uniform 


122  ROMANCE  AND  TRAGEDY  OF  BANKING 

circulation  for  the  whole  country,  based  upon  the  security  of 
such  bonds,  the  issuing  of  such  circulation  was  not  compulsory, 
and  the  privilege  long  ago  ceased  to  be  considered  the  principal 
function  of  the  banks.  In  later  years  of  so  little  importance  was 
this  privilege  considered  that  for  a  long  time  several  of  the  larger 
banks  issued  no  circulation  at  all,  and  a  number  of  them  the 
amount  onl}'  of  the  minimum  bond  deposit  required  by  law. 

Mr.  Cannon  seems  to  have  modified  his  views  in  regard  to  the 
importance  of  this  privilege  before  he  retired  from  office.  In  his 
second  annual  report  he  expressed  the  opinion  that  it  was  believed 
that  the  national  banking  system  would  be  continued,  even  if  the 
associations  organized  under  it  could  not  issue  circulation  at  a 
profit,  because  of  the  greater  prestige  of  national  banks  operat- 
ing harmoniously  under  one  general  law,  uniform  throughout  the 
whole  country,  over  institutions  organized  under  State  laws 
widely  varying  in  character,  and,  in  some  instances,  incomplete 
or  defective. 

No  feature  of  the  national  banking  system  received  greater 
attention,  or  was  more  thoroughly  studied  and  discussed  by 
writers  of  all  shades  of  opinion,  than  the  currency-issuing  func- 
tion of  the  banks,  and  upon  no  question  was  there  a  greater  diver- 
gence of  views.  On  one  phase  of  the  subject  only  did  all  agree, 
and  that  was  the  need  for  a  currency  as  safe  as  our  bond-secured 
circulation  but  more  elastic  and  responsive  to  the  varying  de- 
mands of  trade  and  commerce. 

Mr.  Cannon,  like  nearly  all  of  his  predecessors  and  successors, 
thoroughly  discussed  this  question.  In  anticipation  of  the  time 
when  the  reduction  of  the  public  debt  would  make  it  imperative 
to  provide  some  other  security  for  banknote  circulation  than  Gov- 
ernment bonds,  in  his  second  annual  report  he  reviewed  the 
methods  of  issuing  and  securing  banknote  circulation  by  the  prin- 
cipal commercial  nations  of  the  world,  and  while  admitting  that 
such  systems  successfully  operated  under  other  forms  of  govern- 
ment than  ours  might  not  be  wholly  adapted  to  our  needs,  he  was 
of  the  opinion  that  from  the  experience  of  all  some  valuable  deduc- 
tions could  and  should  be  drawn,  which  would  enable  us  to  pro- 
vide a  currency  that  would  adequately  and  satisfactorily  meet 
our  business  and  political  necessities. 


ROMANCE  AND  TRAGEDY  OF  BANKING  123 

But  years  elapsed  after  Mr.  Cannon  expressed  his  views  on 
this  subject  before  anything  was  done.  The  banking  and  cur- 
rency systems  of  the  older  nations  of  the  world  were  thoroughly 
studied  and  analyzed  by  recognized  authorities.  Volumes  were 
written  upon  the  subject.  Students  of  finance  and  authorized 
monetary  commissions  viewed  their  oprations  at  close  range  and 
at  public  expense,  but  no  accepted  solution  of  the  problem  was 
reached  until  the  enactment  of  the  Federal  Reserve  Act  "To  pro- 
vide for  the  establishment  of  Federal  Reserve  banks,  to  furnish 
an  elastic  currency,  to  afford  means  of  rediscounting  commercial 
paper,  to  establish  a  more  effective  supervision  of  banking  in  the 
United  States  and  for  other  purposes,"  approved  December  23. 
1913. 


Failure  of  the  Marine  National  Bank  of  New  York 

There  were  thirteen  failures  of  national  banks  during  Mr. 
Cannon's  administration,  not  including  the  Metropolitan  Na- 
tional Bank  of  New  York,  which  suspended  during  the  panic  of 
1884,  but  resumed  business  the  following  day. 

The  largest  and  most  important  of  these  failures  was  that  of 
the  Marine  National  Bank  of  New  York,  referred  to  in  the  pre- 
ceding pages.  This  bank  had  been  a  source  of  suspicion  for  some 
time  previous  to  its  suspension,  because  of  the  extensive  opera- 
tions of  its  president,  James  D.  Fish,  in  real  estate,  and  his  con- 
nection with  the  brokerage  firm  of  Grant  &  Ward,  of  which  he 
was  a  member.  This  firm  was  indebted  to  the  national  associa- 
tion, directly  and  indirectly,  to  the  amount  of  over  two  and  a 
half  millions  of  dollars.  This  indebtedness  was  almost  wholly  un- 
secured, and  the  firm  had  overdrawn  its  account  with  the  bank  to 
the  extent  of  over  $750,000.  The  firm  carried  three  accounts 
with  the  bank,  a  private  account  of  one  member  of  the  firm,  a 
general  account,  and  a  special  account.  Many  of  the  notes  for 
which  the  firm  was  liable  were  in  the  names  of  clerks  employed  by 
the  firm,  of  no  financial  standing,  and  relatives  of  one  of  its  mem- 
bers. The  record  shows  that  within  less  than  a  month  before  the 
failure  of  the  bank  a  committee  appointed  by  the  directors  made 
an  examination  of  its  affairs  and  reported  everything  in  a  satis- 


124  ROMANCE  AND  TRAGEDY  OF  BANKING 

factory  condition,  and  within  an  hour  before  the  bank  closed  its 
doors  the  directors  were  in  session  and  were  apparently  wholly 
ignorant  of  its  true  condition. 

The  disclosures  following  the  failure  showed  the  institution  to 
be  hopelessly  insolvent  and  that  for  some  time  previous  thereto  it 
had  been  in  the  grip  of  the  firm  of  Grant  &  Ward,  which  had  been 
extended  credit  beyond  all  prudence  and  reason,  amounting  in  the 
aggregate  to  six  times  the  capital  of  the  association.  The  failure 
of  this  firm  necessitated  the  immediate  closing  of  the  bank. 

The  capital  of  this  bank  was  $400,000  and  the  book  value 
of  its  assets  and  liabilities  was  over  $6,700,000.  A  receiver 
was  appointed  May  13,  1884,  and  an  assessment  was  levied 
by  the  Comptroller  upon  its  stockholders  for  $400,000,  or  one 
hundred  per  cent.,  to  pa}'^  the  debts  of  the  association.  Of  this 
amount  $272,896  was  collected.  The  creditors  were  paid 
$3,774,704,  or  83.465  per  cent,  of  their  claims.  The  receivership 
was  finally  closed  September  30,  1899,  fifteen  years  after  the  date 
of  failure  of  the  bank. 

The  prolongation  of  this  receivership  so  far  beyond  the  aver- 
age time  required  to  liquidate  an  insolvent  national  bank  was  due 
to  the  unusual  difficulties  encountered  by  the  receiver  in  liquidat- 
ing the  bank's  own  assets  and  the  enormous  litigation  in  connec- 
tion with  the  closing  of  the  estates  of  the  firm  of  Grant  &  Ward 
and  James  D.  Fish,  the  president  of  the  Marine  National  Bank, 
with  which  the  affairs  of  the  bank  were  inextricably  involved.  In 
consequence  of  this  litigation  the  bank  was  not  cleared  of  its  en- 
tanglements with  these  estates  until  1891,  when,  under  a  decree  of 
the  court,  the  Marine  National  Bank  received  every  dollar  of  all 
the  assets  of  Grant  &  Ward,  amounting  to  about  $500,000,  and 
$100,000  from  the  estate  of  James  D.  Fish. 

Further  delay  was  occasioned  by  the  litigation  over  the  ques- 
tion of  the  right  of  savings  banks  in  New  York  to  preference  over 
all  other  creditors.  A  suit  involving  this  question  was  then  pend- 
ing in  the  State  courts  of  New  York,  in  the  case  of  Davis  v.  The 
Elmira  Savings  Bank.  The  Metropolitan  Savings  Bank  of  New 
York  City  was  a  creditor  of  the  Marine  National  Bank  for 
$120,000,  and  served  notice  on  the  receiver  that  under  the  bank- 
ing laws  of  the  State  of  New  York  preference  was  claimed  over 


ROMANCE  AND  TRAGEDY  OP  BANKING  125 

all  other  creditors  for  the  payment  of  this  claim  in  full.  This 
notice  had  the  effect  of  tieing  up  the  remaining  assets  of  the 
Marine  National  Bank  in  the  hands  of  the  receiver  until  this  ques- 
tion could  be  judicially  determined.  The  State  courts  rendered  a 
decision  in  favor  of  the  Elmira  Savings  Bank,  and  the  receiver  of 
the  Elmira  National  Bank  appealed  from  that  decision  to  the 
Supreme  Court  of  the  United  States,  where  the  matter  rested  until 
March,  1896,  when  the  latter  court  overruled  the  decision  of  the 
State  court  and  held  that  the  provision  of  the  New  York  State 
banking  law,  making  debts  due  a  savings  bank  by  an  insolvent 
bank  a  preferred  lien,  was  repugnant  to  the  Revised  Statutes  of 
the  United  States,  requiring  the  assets  of  an  insolvent  national 
bank  to  be  distributed  ratably  among  the  creditors  of  such  bank, 
and  was  therefore  inapplicable  in  the  case  of  a  national  bank. 


Failure  of  the  Brokerage  Firm  of  Grant  ^  Ward 

The  firm  of  Grant  &  Ward  was  organized  in  1880  and  origi- 
nally consisted  of  Ferdinand  Ward,  Ulysses  S.  Grant,  Jr.,  and 
James  D.  Fish.  General  U.  S.  Grant  did  not  become  connected 
with  the  firm  until  subsequent  to  his  return  from  his  memorable 
tour  of  Europe,  after  the  close  of  his  second  term  as  President 
of  the  United  States.  At  first  the  General  was  a  limited  partner 
only,  with  a  one-seventh  interest  in  the  business,  but  later  he 
became  an  equal  partner. 

In  some  reminiscences  of  General  Grant,  written  by  Ferdinand 
Ward  and  published  in  December,  1909,  Ward  claimed  that  in- 
stead of  the  firm  of  Grant  &  Ward  being  responsible  for  the  fail- 
ure of  the  Marine  National  Bank,  as  was  the  general  belief,  the 
reverse  was  the  case,  and  that  the  failure  of  the  firm  was  the  result 
of  its  efforts  to  bolster  up  the  bank  when  it  was  in  a  desperate 
condition,  owing  to  large  and  continued  withdrawals  of  deposits 
during  the  financial  stress  of  1884.  The  record,  however,  does 
not  support  this  contention,  but  shows  that  the  failure  of  the 
bank  was  directly  due  to  its  loose  methods  of  dealing  with  the 
brokerage  fii-m  of  Grant  &  Ward  and  the  large  unsecured  and 
uncoUectable  indebtedness  of  this  firm  to  the  bank. 


126  ROIVIANCE  AND  TRAGEDY  OF  BANKING 

While  General  Grant's  individual  resources  suffered  seriously 
through  his  unfortunate  connection  with  the  firm  of  Grant  & 
Ward  and  he  may  have  temporarily  lost  something  in  prestige,, 
whatever  part  he  played  in  the  financial  tragedy  which  brought 
loss  and  ruin  to  so  many  and  saddened  the  closing  months  of  his 
honorable  and  eventful  career,  no  stigma  of  dishonor  or  imputa- 
tion of  wilful  wrong-doing  ever  attached  to  his  name  in  connection 
with  the  transactions  of  this  firm  or  in  any  of  his  public  acts  or 
personal  business  dealings  with  his  fellow-man. 

James  D.  Fish  was  indicted  in  June  following  the  failure  of 
the  bank,  for  embezzling  and  misapplying  the  funds  of  the  asso- 
ciation, and  Ferdinand  Ward  was  indicted  at  the  same  time  for 
aiding  and  abetting  him.  In  December,  1884,  upon  closer  exam- 
ination of  the  law  and  a  fulkr  knowledge  of  the  facts,  both  Fish, 
and  Ward  were  reindicted  to  more  fully  cover  all  their  transac- 
tions, including  false  entries  in  the  books  of  the  bank  made  for  the 
purpose  of  deception. 

The  trial  of  Fish  was  held  during  March  and  April,  1885, 
occupying  a  month,  and  resulted  in  his  conviction.  Exceptions 
were  taken  by  his  counsel  to  some  of  the  points  of  law  involved 
and  arguments  were  heard  before  the  full  bench  on  these  excep- 
tions in  June,  1885,  with  the  result  that  the  Government  was  sus- 
tained and  Fish  was  sentenced  for  a  term  of  ten  years  in  the  peni- 
tentiary. 

Ferdinand  Wai'd,  in  the  meantime,  was  confined  in  the  Ludlow 
Street  jail,  under  arrest  by  the  State  authorities,  which  prevented 
his  trial  under  the  Federal  indictment  as  an  aider  and  abettor  of 
Fish.  He  was,  however,  indicted  by  the  State  Grand  Jury,  for 
larceny  in  obtaining  money  under  false  pretenses  by  the  use  of 
checks  on  a  bank  in  which  he  had  no  funds,  with  the  intent  to  de- 
ceive and  defraud.  His  trial  commenced  on  October  28,  1885, 
lasted  one  week,  and  resulted  in  his  conviction  and  sentence  to  the 
penitentiary  for  a  term  of  ten  years. 

Fish,  after  serving  the  greater  part  of  his  sentence  in  the 
Auburn  State  Prison,  was  pardoned  by  President  Cleveland. 
After  his  release  from  the  penitentiary,  he  lived  in  strict  retire- 
ment and  spent  much  of  his  time  in  his  library  among  his  books 
and  papers,  of  which  he  had  a  rare  collection.     He  died  at  his 


ROMANCE  AND  TRAGEDY  OF  BANKING  127 

residence  in  Brooklyn,  N.  Y.,  in  March,  1912,  at  the  advanced 
age  of  ninety-three  years. 

Legislation  Recommended 

No  amendments  to  the  national  banking  or  currency  laws  were 
enacted  during  Mr.  Cannon's  administration,  and  the  only  ma- 
terial amendment  recommended  by  him  was  in  connection  with 
cotton  loans  by  the  banks  in  the  South.     Loans  of  this  character 
during  Mr.  Cannon's  time  and  for  many  years  thereafter  were  a 
source  of  perplexity  to  the  Comptroller's  office  and  to  the  banks 
in  the  cotton  sections  as  far  as  the  handling  of  cotton  transac- 
tions within  the  limitations  of  law  were  concerned  as  then  defined 
by  Section  5200,  Revised  Statutes  of  the  United  States.     Cotton 
loans  were  represented  largely  by  overdrafts,  the  very  worst  form 
in  which  credit  can  be  extended,  and  were  subject  to  the  statutory 
limit.     It  seemed  impossible,  or  impracticable  at  least,  for  cotton 
buyers  to  handle  their  purchases  in  a  way  that  would  bring  their 
transactions  with  the  banks  within  the  exceptions  to  the  limit  of 
loans.     A  great  deal  of  cotton  is  bought  in  small  quantities  from 
different  planters  and  must  be  paid  for  in  cash.     The  banks  are 
called  upon  to  supply  the  funds  for  this  purpose  while  the  cotton 
is  being  assembled  and  held  for  shipment.     Notes  or  drafts  cannot 
always  be  used  in  making  such  purchases,  and  therefore  it  is  im- 
possible for  the  cotton  buyers  to  obtain  accommodations  from 
the  banks  in  the  form  of  discounts  of  commercial  or  business 
paper  or  bills  of  exchange,  which  are  excepted  from  the  limit  of 
loans.     Cotton  stored  in  warehouses  is  an  excellent  and  perfectly 
safe  security  for  loans,  but  as  the  law  made  no  distinction  between 
a  secured  and  unsecured  loan  in  fixing  the  limit,  advances  made 
upon  the  security  of  warehouse  receipts  were  subject  to  the  stat- 
utory restriction  the  same  as  other  loans. 

Various  forms  of  evasion  or  circumvention  of  the  law  were 
resorted  to  by  the  banks  in  making  cotton  loans,  and  the  Comp- 
troller was  frequently  appealed  to  for  a  more  liberal  interpreta- 
tion of  its  provisions.  The  language  of  the  statute,  however,  was 
explicit  and  would  admit  of  no  equivocation.  Only  two  exceptions 
were  made,  namely,  the  discount  of  commercial  or  business  paper 


128  ROMANCE  AND  TRAGEDY  OF  BANKING 

and  bills  of  exchange,  drawn  in  good  faith  against  actually  exist- 
ing values. 

It  was  contended  by  some  bankers  that  a  draft  drawn  by  an 
agent  upon  the  corporation  or  firm  which  he  represented,  and 
accepted  by  the  corporation  or  firm,  was  a  bill  of  exchange  within 
the  meaning  of  the  law  and  as  such  was  excepted  from  the  limit 
of  loans.  Such  paper,  however,  has  none  of  the  characteristics 
of  a  bill  of  exchange,  which  must  be  drawn  by  one  person  upon  a 
second,  payable  to  a  third  person.  Where  a  bill  of  exchange  is 
drawn  by  an  agent  upon  his  principal  there  is  only  one  party 
liable  for  the  funds  represented.  When  drawn  by  a  corporation 
or  firm  upon  itself  it  was  held  to  be  nothing  more  than  a  promise 
to  pay  money  in  accordance  with  the  terms  of  the  draft.  There 
is  only  one  party  to  the  paper.  It  is,  in  substance,  a  promissory 
note.  The  law  does  not  require  it  to  be  presented  to  the  drawee 
for  acceptance,  as  he  had  already  accepted  the  draft  by  drawing 
it.  Such  an  instrument,  therefore,  is  not  a  bill  of  exchange,  as  it 
does  not  bind  for  payment,  after  acceptance,  a  drawer  and  a 
drawee  as  distinct  persons,  companies,  corporations  or  firms. 

It  was  impossible,  therefore,  for  the  Comptroller  to  so  inter- 
pret the  law  as  to  afford  the  banks  of  the  South  the  relief  they 
desired  to  enable  them  to  extend  to  their  customers  the  accommo- 
dations necessary  to  handle  their  cotton  purchases.  Mr.  Cannon, 
therefore,  recommended  that  the  law  be  amended  so  as  to  permit 
loans  in  excess  of  the  ten  per  cent,  limit  to  be  made  upon  the 
security  of  warehouse  receipts  or  some  other  form  of  collateral. 
This  could  safely  have  been  done  within  proper  limitations. 

The  Federal  Reserve  Act,  enacted  in  December,  1913,  auth- 
orized the  banks  to  extend  credit  by  accepting  drafts  or  bills  of 
exchange  which  grow  out  of  transactions  involving  the  importa- 
tion or  exportation  of  goods  or  which  grow  out  of  transactions 
involving  the  domestic  shipment  of  goods,  provided  shipping  doc- 
uments conveying  or  securing  title  are  attached  at  the  time  of 
acceptance;  or  which  are  secured  at  the  time  of  acceptance  by  a 
warehouse  receipt  or  other  such  document  conveying  or  securing 
title  covering  readily  marketable  staples.  This  provision  of  law, 
however,  did  not  relieve  the  situation  materially  in  the  cotton 
states,  as  the  volume  of  business  of  this  kind  which  the  banks 


ROMANCE  AND  TRAGEDY  OF  BANKING  129 

could  handle  was  very  restricted.  Furthermore,  the  acceptance 
business  was  a  new  feature  in  banking  which  was  not  readily  or 
clearly  understood  by  the  average  country  banker. 

It  was  not  until  the  amendment  of  October  22,  1919,  to  Sec- 
tion 5200  that  material  relief  was  afforded  the  banks  in  the  way 
of  extending  larger  accommodations  to  dealers  in  cotton  and 
other  commodities. 

This  amendment  to  the  law  authorized — 

1.  The  discount,  without  limit,  of  drafts  and  bills  of 

exchange  secured  by  shipping  documents  con- 
veying title  to  goods  shipped. 

2.  Demand  obligations  when  secured  by  documents  cov- 

ering commodities  in  actual  process  of  shipment. 

3.  Bankers'  acceptances  of  the  kinds  described  in  the 

Federal  Reserve  Act. 

4.  Discount  of  notes  up  to  twenty-five  per  centum  of 

the  capital  and  surplus  if  secured  by  shipping 
documents,  warehouse  receipts,  or  other  such 
documents  conveying  or  securing  title  covering 
readily  marketable  non-perishable  staples,  in- 
cluding livestock,  when  the  actual  market  value 
of  the  property  securing  the  obligation  is  not  at 
any  time  less  than  one  hundred  and  fifteen  per 
centum  of  the  face  amount  of  the  notes  secured 
by  such  documents  and  when  such  property  is 
fullv  covered  bv  insurance. 

This  latter  provision  extending  the  limitation  on  direct  loans 
had  been  in  force  only  a  short  time  at  the  date  of  this  writing, 
but  it  is  believed  that  it  will  enable  the  banks  of  the  South  and 
elsewhere  to  satisfactorily  and  adequately  finance  transactions  in 
cotton  and  in  other  staple  products  within  prudent  and  legal 
limitations. 


■.^«%T- 


rt,-*    '.-c- 


WILLIAM  L.  TRENHOLM 
Comptroller  of  the  Currency,  1886- 1889 


CHAPTER  VIII 

Administration  of  Comptroller  Trenholm 

WILLIAM  L.  TRENHOLM,  the  sixth  ComptroUer  of  the 
Currency,  was  born  at  Charleston,  S.  C,  February  3, 
1836.  After  graduation  from  the  South  Carolina  Col- 
lege he  became  a  partner  in  the  commercial  houses  of  John  Fraser 
&  Company,  of  Charleston;  Trenholm  &  Company,  of  New  York, 
and  Fraser,  Trenholm  &  Company,  of  Liverpool,  England.  He 
lived  in  England  for  two  years.  He  volunteered  for  service  with 
the  South  Carolina  troops  in  December,  1861,  and  served  in  the 
Confederate  Army  throughout  the  Civil  War. 

After  the  close  of  the  war,  he  resumed  business  in  Charleston. 
In  November,  1885,  he  was  appointed  one  of  the  Board  of  United 
States  Civil  Service  Commissioners,  and  retained  this  position 
until  he  was  appointed  Comptroller  of  the  Currency  by  President 
Cleveland,  April  20,  1886.  He  was  the  first  Democrat  who  ever 
held  the  office  of  Comptroller.  With  the  exception  of  these  two 
positions,  he  never  before  had  held  public  office,  except  that  of 
Alderman  in  the  Common  Council  of  his  native  city. 

His  administration  of  the  Currency  Bureau  extended  to  April 
30,  1889,  although  he  practically  relinquished  the  office  on  Janu- 
ary 1,  1889,  to  accept  the  presidency  of  the  American  Surety 
Company  of  New  York  City,  which  he  assisted  in  organizing.  He 
was  president  of  this  company  until  January  18,  1898,  when  he 
voluntarily  resigned,  to  accept  the  presidency  of  the  North  Amer- 
ican Trust  Company  of  New  York,  which  position  he  assumed  on 
the  following  day.  He  resigned  from  this  company  in  May,  1899, 
after  which  time  he  devoted  his  attention  to  his  private  business 
affairs.  He  died  in  New  York  City,  of  pneumonia,  January  11, 
1901,  at  the  age  of  sixty-five. 

Mr.  Trenholm  was  a  scholarly  and  most  genial  gentleman, 
affable,  and  considerate  of  everybody  with  whom  he  came  in  busi- 
ness or  social  contact.     He  was  a  man  of  strict  integrity,  firm  in 

131 


132  ROMANCE  AND  TRAGEDY  OF  BANKING 

his  convictions  and  tenacious  in  his  views.  Although  of  limited 
financial  means,  he  was  generous  to  a  fault.  He  was  esteemed 
very  highly  by  the  officers  and  employees  of  the  Currency  Bureau 
and  by  the  officials  of  the  Treasury  Department  in  general. 

Unprecedented  Reduction  in  Circulation 

The  first  year  of  Mr.  Trenholm's  administration  of  the  Cur- 
rency Bureau  was  marked  by  an  unprecedented  reduction  in  na- 
tional bank  circulation.  During  that  year  the  circulation  was 
reduced  $56,593,533,  the  largest  reduction  during  one  year  in  the 
history  of  the  Bureau. 

This  large  retirement  of  circulation  was  due  to  the  high 
premium  which  prevailed  on  the  four  and  four  and  one-half  per 
cent.  Govermnent  bonds,  and  the  rapid  retirement  of  the  three 
per  cent,  bonds,  redeemable  at  the  option  of  the  Government.  Of 
the  $224,612,150  of  these  bonds  outstanding  June  30,  1884,  the 
banks  held  $172,412,550,  and  by  June  30,  1886,  the  total  of  these 
bonds  had  been  reduced  to  $144,046,600,  of  which  amount  the 
banks  held  .$107,782,100.  The  high  premium  on  the  four  and 
four  and  one-half  per  cent,  bonds  induced  many  banks  to  reduce 
their  bond  deposits  to  the  minimum  required  by  law,  in  order  to 
dispose  of  the  excess  and  take  advantage  of  the  prevailing  high 
premium.  One  hundred  and  seventy-two  new  banks  were  organ- 
ized during  that  year,  and  as  the  three  per  cent,  bonds  were  sub- 
ject to  call  at  any  time,  there  was  no  disposition  to  invest  in  these 
securities.  This  had  the  effect  of  increasing  the  demand  for  the 
four  and  four  and  one-half  per  cent,  bonds  and  stimulated  their 
market  value. 

The  Act  of  July  12,  1882,  authorized  an  issue  of  three  per 
cent,  bonds  for  the  purpose  of  taking  up  the  three  and  one-half 
per  cents.,  and  during  the  years  1886  and  1887  the  three  per  cent, 
bonds  were  called  by  the  Treasury  Department  for  redemption, 
which  resulted  in  a  further  reduction  of  circulation.  From  1882 
to  1887,  there  were  991  new  banks  organized,  with  an  authorized 
capital  stock  of  one  hundred  and  eleven  millions  of  dollars.  While 
these  banks  were  entitled  to  receive  $99,999,000  in  circulation, 


ROMANCE  AND  TRAGEDY  OF  BANKING  133 

they  deposited  only  $23,892,100  in  bonds,    and    received    only 
$21,495,100  in  circulation. 

The  interest  on  the  three  and  one-half  per  cents,  ceased  when 
they  were  called  for  redemption.  Consequently,  they  were  no 
longer  available  as  security  for  circulation,  as  the  law  required  a 
deposit  of  interest-bearing  bonds.  It  was  claimed  by  some  of  the 
banks  that  when  a  deposit  of  interest-bearing  bonds  had  once  been 
made  the  banks  could  not  be  compelled  to  replace  them  with  other 
bonds,  or  to  retire  the  circulation  issued  upon  them.  This  ques- 
tion was  finally  settled,  however,  by  an  opinion  of  the  Attorney 
General  of  the  United  States,  to  whom  the  matter  was  referred, 
who  held  that  bonds  on  which  interest  had  ceased  could  not  law- 
fully be  received  or  held  as  security  for  circulation. 

Comptroller  Trenholm's  Circular  Letter  to  the  Banks 

In  1887  Comptroller  Trenholm  sent  a  circular  letter  to  all 
the  national  banks  inviting  them  to  submit  such  suggestions  for 
amendments  to  the  national  banking  laws  as,  in  their  judgment, 
would  tend  toward  the  improvement  and  perpetuation  of  the  sys- 
tem. More  than  forty  plans  were  involved  in  the  replies  received, 
all  bearing  upon  the  note-issuing  function  of  the  banks. 

In  his  annual  report  for  1887,  Mr.  Trenholm  summarized 
these  various  propositions  under  five  headings,  eliminating  such 
as  contemplated  a  gold  or  silver  deposit  as  security  for  circula- 
tion. Only  three  of  the  five  plans  suggested  he  regarded  as  com- 
ing within  the  range  of  probable  adoption,  viz. : 

1.  To  increase  the  inducements  for  the  banks  to  deposit 
United  States  bonds  as  a  basis  for  national  bank  circulation. 

2.  To  provide  by  a  new  issue  of  bonds  for  a  continuance  of 
the  present  or  some  modified  system  of  national  bank  circulation 
based  upon  the  security  of  United  States  bonds. 

3.  To  allow  the  banks  to  issue  circulation  upon  their  general 
credit,  without  requiring  specific  security  to  be  deposited. 

After  first  presenting  his  views  as  to  some  of  the  obstacles 
which  surrounded  the  adoption  of  either  of  these  propositions, 
as  affecting  the  interests  of  the  Government,  the  banks,  and  the 


134  ROMANCE  AND  TRAGEDY  OF  BANKING 

public,  Mr.  Trenholm  then  proceeded  to  analyze  their  relative 
merits  from  his  point  of  view. 

The  refunding  operations  of  the  Treasury  Department  in 
United  States  bonds,  and  subsequent  legislation  increasing  the 
amount  of  circulation  that  might  be  issued  from  ninety  per  cent, 
to  the  par  of  the  bonds  deposited,  accomplished  in  a  measure  some 
of  the  objects  sought  to  be  attained  by  the  first  and  second  of  the 
suggestions  quoted,  leaving  only  the  third  as  having  any  bearing 
on  the  conditions  then  existing  and  the  proposed  amendments  to 
the  currency  laws. 

In  regard  to  this  proposition,  Mr.  Trenholm  expressed  the 
view  that  it  was  very  doubtful  whether  the  strong  and  conserva- 
tively managed  banks  would  be  disposed  to  jeopardize  their  credit 
with  their  depositors  by  issuing  circulation  secured  by  a  first  lien 
upon  the  assets  of  the  bank,  thus  making  the  noteholder  a  pre- 
ferred creditor  over  the  depositor  and  weakening  his  security  to 
that  extent.  Mr.  Trenholm  expressed  the  further  view  that  if 
such  a  proposition  were  adopted  the  circulating  notes  issued 
under  such  conditions  would  be  chiefly  to  banks  having  a  small 
line  of  deposits,  whose  assets  were  of  such  an  uncertain  character 
as  to  constitute  a  very  poor  security,  even  as  a  first  lien  for 
circulation. 

The  circulating  notes  of  a  bank  based  upon  the  security  of 
its  credit,  he  said,  are,  of  course,  no  better  than  the  assets  of  the 
association  issuing  the  notes,  plus  the  individual  liability  of  its 
shareholders.  Under  the  system  of  bond-secured  circulation,  the 
notes  of  the  weakest  bank  were  as  good  as  those  of  the  strongest. 
The  relative  strength  of  the  banks  in  nowise  affected  the  security 
of  their  notes.  Under  an  asset  or  credit  currency  system,  the 
reverse  would  be  the  case,  and  the  inability  of  a  few  associations 
to  redeem  their  circulation  in  full  in  the  event  of  insolvency,  would 
have  the  effect  of  discrediting  the  note  issues  of  a  large  number 
of  banks,  especially  those  of  the  smaller  capital  class,  which  under 
a  bond-secured  circulation  were  accepted  at  par,  without  ques- 
tion, in  any  part  of  the  United  States.  He  expressed  the  belief 
that  it  would  require  but  a  few  failures  of  this  kind  to  bring  a 
return  of  the  conditions  which  existed  before  the  establishment  of 
the  national  banking  system,  in  respect  to  banknote  circulation. 


ROMANCE  AND  TRAGEDY  OF  BANKING  135 

Mr.  Trenholm  was  of  the  opinion  that  whatever  form  of  secur- 
ity for  bank  issues  should  ultimately  take  the  place  of  Govern- 
ment bonds,  in  whole  or  in  part,  a  safe  and  satisfactory  circula- 
tion, that  would  pass  current  in  every  section  of  the  country  with- 
out question,  would  have  to  rest  upon  something  of  more  confident 
stability  than  the  bare  credit  of  the  issuing  bank ;  and  that  the 
confidence  of  depositors  in  the  banks  certainly  would  not  be  in- 
creased if  the  noteholder  were  made  a  preferred  creditor  over  the 
depositor,  as  was  contemplated  by  most  of  the  schemes  then  pre- 
sented, by  making  the  circulation  a  first  lien  upon  the  assets  of 
the  issuing  bank,  thus  lessening  the  security  of  the  depositor  to 
that  extent. 

Confidence  of  depositors  in  the  security  of  their  deposits  is 
as  essential  to  the  success  of  the  national  banking  system  as  the 
certainty  of  redemption  at  par  of  the  circulation  is  to  the  note- 
holder to  insure  the  passing  current  of  such  circulation  in  the 
hands  of  the  people  of  every  section  of  the  country. 

Plan  for  National  Currency  Reform 

Rand,  McN ally's  Banking  Magazine  for  May,  1888,  contains 
an  interesting  article  contributed  by  Comptroller  Trenholm,  out- 
lining a  plan  for  national  currenc}^  reform. 

This  plan  contemplated  the  formation  of  unions  among  the 
national  banks,  for  the  purpose  of  issuing  currency  based  on  their 
assets.  The  banks  forming  each  union  were  to  be  required  to 
have  in  the  aggregate  not  less  than  three  nor  more  than  ten 
millions  of  capital.  Each  bank  in  the  union  was  to  appoint  a 
deputy  and  the  deputies  were  to  form  a  board  of  control.  When 
the  deputies  had  convened  and  organized  the  union  they  were 
then  to  be  authorized  to  apply  to  the  Comptroller  of  the  Cur- 
rency for  registration. 

Each  bank  in  the  union  was  to  be  required  to  furnish  to  the 
board  of  control  a  certified  copy  of  the  resolution  of  its  stock- 
holders authorizing  the  association  to  enter  the  union,  and  bind- 
ing the  bank  to  make  the  notes  issued  by  the  union  a  first  lien  on 
all  the  assets  of  the  banks  forming  the  union. 


136  ROMANCE  AND  TRAGEDY  OF  BANKING 

Each  board  of  control  was  to  be  required  to  appoint  a  chair- 
man and  a  manager,  subject  to  the  approval  of  the  Comptroller 
of  the  Currency,  and  the  Comptroller  was  to  appoint  a  Register 
of  Currency,  subject  to  the  approval  of  the  board  of  control. 

The  Register  of  the  Currency  was  to  receive  circulation  from 
the  Comptroller  and  deliver  it  to  the  manager  of  the  union,  when 
the  latter  furnished  to  him  the  security  required,  consisting  of 
unmatured  business  paper  of  the  banks  to  an  amount  equal  to  not 
less  than  one  and  a  third  times  the  amount  of  the  currency  issued 
in  exchange  therefor. 

The  manager  was  to  receive  the  security  from  the  banks 
through  the  board  of  control,  and,  after  approving  its  solvency, 
turn  the  security  over  to  the  Register  and  receive  the  notes  issued 
thereon.  Before  the  currency  should  be  delivered  to  the  bank  the 
seal  of  the  union  was  required  to  be  imprinted  thereon.  This  seal 
was  to  be  in  two  parts,  one  part  to  be  in  the  custody  of  the  man- 
ager and  the  other  to  be  held  by  the  Register. 

The  plan  also  provided  various  regulations  as  to  the  manner 
in  which  the  business  of  the  board  of  control  should  be  conducted, 
the  deputies  appointed,  the  incomplete  circulation  prepared  in 
advance  under  the  supervision  of  the  Comptroller,  the  withdrawal 
and  substitution  of  business  paper  as  it  matured,  etc. 

In  addition  to  this  security,  a  redemption  fund  was  required 
to  be  maintained  with  the  Treasurer  of  the  United  States  equal  in 
amount  to  five  per  cent,  of  the  circulation  outstanding,  and  a 
reserve  fund  of  gold  coin  in  bank  equal  to  twenty  per  cent,  of 
such  circulation. 

Prevision  was  made  for  the  retirement  of  the  notes  of  the  In- 
solvent union  banks  by  the  deposit  of  lawful  money  in  the  Treas- 
ury of  the  United  States,  and  of  any  union  when  the  aggregate 
capital  of  the  banks  forming  such  union  became  reduced  from  any 
cause  to  less  than  the  amount  required,  or  when  dissolved  in  any 
other  way. 

Notes  were  not  to  be  issued  in  excess  of  three-fourths  of  the 
unimpaired  capital  of  the  banks  comprising  the  union,  and  were 
to  constitute  part  of  the  national  currency  authorized  by  law. 

The  foregoing  is  a  general  outline  of  the  currency  plan  pro- 
posed by  Mr.  Trenliolm.     The  notes  issued  were  to  be  a  first  lien 


ROMANCE  AND  TRAGEDY  OF  BANKING  137 

on  all  the  assets  of  the  banks,  each  bank  being  to  the  extent  of  its 
assets  liable  for  all  the  notes  issued  by  any  of  the  other  banks 
composing  the  union. 

The  bill  reported  by  the  Banking  and  Currency  Committee  of 
the  House  of  Representatives  on  April  21,  1908,  known  as  "The 
Fowler  Bill,"  and  the  Federal  Reserve  Act  of  December  23,  1913, 
were  similar  in  some  of  their  features  to  the  plan  of  Comptroller 
Trenholm,  as  outlined  above. 

The  Fowler  Bill  proposed  to  create  a  Division  of  Banking  and 
Currency  in  the  Treasury  Department  to  take  the  place  of  the 
present  Bureau  of  the  Currency.  This  Division  was  to  be  in 
charge  of  a  board  of  control,  consisting  of  three  men.  This  board 
was  to  supersede  the  Comptroller  of  the  Currency,  and  was  to 
divide  the  country  at  large  into  clearing-house  districts.  Each 
district  was  to  have  a  clearing-house  city,  through  which  all  the 
circulating  notes  were  to  be  issued  to  the  banks  within  that 
district. 

The  Act  of  Congress  approved  May  30,  1908,  known  as  the 
Emergency  Currency  Law,  contained  a  similar  provision  to  that 
of  the  Trenholm  plan  and  the  Fowler  Bill,  for  the  division  of  the 
country  at  large  into  districts.  The  Act  referred  to  provided 
for  the  formation  of  currency  associations  by  banks  of  not  less 
than  ten  in  number,  with  an  unimpaired  capital  and  surplus  of 
not  less  than  five  millions  of  dollars.  The  noteholder  under  each 
of  these  plans  was  made  a  preferred  creditor. 

Comptroller  Trenholm  seems  to  have  modified  his  views  in 
regard  to  this  feature  of  his  plan,  as  they  are  inconsistent  with 
his  objections  to  such  a  preference  expressed  a  year  earlier  to 
the  same  proposition  presented  by  the  bankers. 

From  an  administrative  point  of  view  all  three  plans  were 
complicated  and  cumbersome,  so  far  as  affording  an  adequate 
means  for  a  speedy  and  automatic  expansion  and  contraction  of 
the  currency  were  concerned. 

Failure  of  the  Fidelity  National  Bank 

The  most  notable  bank  failure  that  occurred  during  Mr.  Tren- 
holm's  administration  was  that  of  the  Fidelity  National  Bank  of 


138  ROMANCE  AND  TRAGEDY  OF  BANKING 

Cincinnati,  Ohio,  which  closed  its  doors  June  21,  1887,  and  was 
placed  in  the  hands  of  David  Armstrong  as  receiver,  June  27. 

The  life  of  this  bank  was  spectacular  and  of  short  duration. 
It  was  organized  February  27,  1886,  by  E.  L.  Harper,  with 
Briggs  Swift  as  president.  Harper  as  vice-president  and  manager, 
and  Ammi  Baldwin  as  cashier.  It  had  a  capital  stock  of 
$1,000,000  and  during  the  brief  period  of  its  existence  of  less  than 
two  years  had  built  up  a  line  of  deposits  amounting  to  nearly  five 
millions  of  dollars.  The  success  of  this  institution  in  accumulat- 
ing such  a  large  amount  of  deposits  in  such  a  short  time  was  due 
to  the  payment  by  the  bank  of  four  per  cent,  interest,  which  had 
the  effect  of  attracting  funds  which  would  not  otherwise  have  been 
received.  Additional  inducements  were  offered  in  that  no  charge 
was  to  be  made  for  collections. 

While  this  bank  was  under  suspicion  by  the  Comptroller's 
office  for  several  weeks  before  its  failure,  the  Comptroller  had  no 
reason  to  believe  that  it  was  otherwise  than  in  a  solvent  condition, 
until  June  20,  1887,  when  he  received  notice  of  the  protest  in  New 
York  of  $200,000  of  its  drafts.  The  examiner  was  then  instructed 
to  make  an  immediate  examination  of  the  institution,  and  upon 
reporting  it  to  be  insolvent,  was  directed  to  close  its  doors  and 
take  possession.  Comptroller  Trenholm  went  at  once  to  Cincin- 
nati and  personally  directed  the  operations  of  the  examiner  and 
the  receiver.  The  failure  of  the  bank  was  due  to  the  reckless 
management  of  its  directors,  and  the  criminal  use  of  the  funds  of 
the  association  by  Harper  in  wheat  speculations  in  Chicago. 

The  claims  proved  under  the  receivership  of  this  association 
amounted  to  $4,344,281.  The  receiver  collected  from  its  assets 
$2,876,819.  The  stockholders  were  assessed  one  hundred  per 
cent.,  or  $1,000,000,  and  there  was  realized  from  this  source 
$319,170.  The  total  dividends  paid  creditors  amounted  to  $2,- 
610,351,  or  59.95  per  cent. 

While  this  trust  was  practically  closed  long  before  the  pay- 
ment of  the  supplemental  dividend  of  55/100  of  one  per  cent,  on 
January  13,  1909,  it  was  not  finally  closed  on  the  books  of  the 
Comptroller's  office  until  October  30,  1909.  The  delay  in  pay- 
ment of  the  supplemental  or  final  dividend  was  due  to  the  fact 
that  a  judgment  for  $7,000,000    was    obtained    against    E.    L. 


ROMANCE  AND  TRAGEDY  OF  BANKING  139 

Harper  by  the  receiver  of  the  Fidelity  Trust  Company  of  Cin- 
cinnati, and  the  remaining  funds  in  the  hands  of  the  receiver  were 
held  awaiting  the  satisfaction  of  this  judgment.  After  a  thor- 
ough investigation,  however,  no  attachable  property  belonging  to 
Harper  could  be  found,  and  the  judgment  was  finally  offered  for 
aale  by  Stanagc  &  Company  of  Cincinnati  for  the  sum  of  $1000. 


Peculiar  Construction  of  the  Law 

Although  the  Comptroller  of  the  Currency  was  empowered 
by  law  to  close  and  appoint  a  receiver  for  any  national  bank 
known  to  be  insolvent,  at  the  time  of  the  failure  of  this  institution 
a  peculiar  construction  was  placed  upon  the  provision  in  Section 
5239  of  the  Revised  Statutes  of  the  United  States  by  the  Comp- 
troller's office.  This  section  authorizes  the  Comptroller  to  insti- 
tute a  suit  to  forfeit  the  charter  of  any  national  bank  whose  di- 
rectors knowingly  violate  or  knowingly  permit  to  be  violated  by 
any  of  the  officers  or  agents  of  the  association  any  of  the  pro- 
visions of  the  national  banking  laws ;  and  held  every  director  who 
participated  in  or  assented  to  such  violations  liable  in  his  per- 
sonal or  individual  capacity  for  all  damages  which  the  associa- 
tion, its  shareholders,  or  any  other  person  may  have  sustained  in 
consequence  thereof.  It  was  then  held  that  the  individual  liabil- 
ity of  the  directors  could  be  enforced  only  after  the  charter  of 
the  association  had  been  declared  forfeited  by  a  United  States 
Court.  Suit  was  therefore  instituted  in  the  name  of  the  Comp- 
troller to  dissolve  this  corporation  after  it  had  been  practically 
dissolved  by  being  placed  in  the  hands  of  a  receiver.  A  decree 
was  issued  by  the  United  States  Circuit  Court  for  the  Southern 
District  of  Ohio,  on  July  12,  1887,  declaring  the  charter  of  the 
association  forfeited,  and  upon  the  basis  of  this  decree  suit  was 
brought  by  the  receiver  against  every  director  of  the  bank  impli- 
cated in  the  violations  of  law  complained  of. 

Since  that  time  the  courts  have  held  that  the  forfeiture  of  the 
charter  of  a  bank  in  a  suit  brought  by  the  Comptroller  of  the 
Currency  for  that  purpose  is  not  a  condition  precedent  to  the 
maintenance  of  a  suit  against  directors  for  damages  resulting 
from  violations    of   law.      The   course   pursued   by   Comptroller 


140  ROMANCE  AND  TRAGEDY  OF  BANKING 

Trenholm,  therefore,  has  not  since  been  followed  by  the  Comp- 
troller's office,  and  the  case  of  the  Fidelity  National  Bank  of  Cin- 
cinnati is  one  of  the  rare  instances  in  which  forfeiture  of  charter 
proceedings  were  instituted  by  the  Comptroller  of  the  Currency 
for  violations  of  law. 


Criticisms  of  Official  Supervision  of  the  Banks 

Whenever  a  national  bank  has  failed,  no  matter  from  what 
cause,  the  system  of  official  supervision  by  the  Comptroller  of  the 
Currency,  or  of  examination  by  a  national  bank  examiner,  has 
been  subject  to  more  or  less  criticism  by  the  public  in  general  and 
by  the  creditors  and  stockholders  of  the  failed  association  in 
particular.  The  failure  of  the  Fidelity  National  Bank  was  no 
exception  to  this  rule.  The  national  bank  examiner  was  severely 
criticised  for  not  sooner  discovering  and  reporting  the  true  con- 
dition of  the  bank's  affairs,  and  the  Comptroller  was  censured 
for  not  having  closed  the  association  before  it  reached  the  condi- 
tion disclosed  by  the  failure.  While  the  facts  were,  there  was 
neither  incompetency  nor  negligence  on  the  part  of  the  examiner, 
nor  dereliction  of  duty  nor  undue  leniency  on  the  part  of  the 
Comptroller.  Each  performed  his  duty  to  the  best  of  his  ability, 
with  such  knowledge  of  the  situation  as  it  was  possible  to  obtain, 
and  within  the  limitations  of  law.  In  those  days  administrative 
officials  were  not  accustomed  to  the  modern  methods  of  usurping 
the  functions  of  Congress  by  arbitrarily  exercising  powers  not 
conferred  upon  them  by  statute.  They  were  content  in  the  dis- 
charge of  their  duty,  as  they  understood  it,  within  the  limitations 
of  law  and  in  placing  the  responsibility  for  conditions  beyond 
their  control  where  it  properly  belonged  upon  incompetent  or 
fraudulent  bank  management  or  in  defective  statutes  which  pro- 
vided no  adequate  means  of  preventing  the  unsatisfactory  condi- 
tions which  ultimately  led  to  bank  failures.  An  administrative 
official  is  sworn  to  execute  the  law  as  it  exists,  and  if  he  discharges 
his  duty  in  this  respect  he  cannot  properly  be  held  accountable 
for  inadequacies  of  the  statutes,  or  be  expected  to  supply  their 
defects  by  unauthorized  administrative  regulations. 


ROMANCE  AND  TRAGEDY  OF  BANKING  141 

Intelligent  discussion  in  the  public  prints  of  the  manner  in 
which  administrative  officers  discharge  their  duties  is  generally 
wholesome  and  is  frequently  productive  of  beneficial  results.  Er- 
roneous criticism,  based  as  it  usually  is  upon  ignorance  of  both 
the  law  and  the  facts,  is  not  only  unjust  to  the  official  against 
whom  it  is  directed,  but  is  misleading  and  therefore  accomplishes 
no  good  purpose.  And  such  generally  has  been  the  nature  of  the 
criticisms  in  connection  with  almost  every  national  bank  failure. 


The  Chicago  Wheat  Deal 

The  failure  of  the  Fidelity  National  Bank  of  Cincinnati  was 
the  result  of  Harper's  speculations  in  the  Chicago  wheat  market. 
He  is  reported  to  have  commenced  his  operations  in  1886,  the 
same  year  in  which  the  bank  was  organized,  and  to  have  used  every 
dollar  of  the  available  resources  of  the  bank  to  support  the  efforts 
of  himself  and  those  who  were  associated  with  him  to  corner  the 
wheat  market. 

It  appears  from  the  records  of  the  Comptroller's  office  and 
the  written  history  of  this  wheat  deal,  published  at  the  time,  that 
for  several  years  previously  California  wheat  cargoes  had  been  a 
dead  weight  upon  the  market,  and  it  was  understood  that  some 
prominent  capitalists  of  that  State  had  secured  control  of  the 
California  supply  for  the  purpose  of  bulling  the  market.  This 
fact,  and  the  prospect  of  a  diminished  wheat  crop  together  with 
an  active  export  demand,  were  regarded  as  a  favorable  time  for  a 
successful  bull  campaign.  Harper  and  his  associates  readily  rec- 
ognized these  conditions,  and  in  December,  1886,  were  reported 
to  have  bought  thirty  million  bushels  of  wheat.  But  the  move- 
ment does  not  appear  to  have  been  a  success,  as  the  January  and 
February  wheat  receipts,  which  were  usually  light,  proved  to  be 
unexpectedly  full.  In  consequence,  Harper  was  compelled  to  dis- 
pose of  half  of  his  holdings,  which  left  him  with  fifteen  million 
bushels  on  hand.  During  the  early  part  of  March  of  that  year 
other  big  operators  of  Chicago  made  two  raids  on  the  market, 
selling  millions  of  bushels  short,  all  of  which  were  taken  up  and 
held  by  some  unknown  parties.  This,  it  was  stated,  was  the 
foundation  of  the  great  short  interest  that  was  later  cornered  by 


142    ROMANCE  AND  TRAGEDY  OF  BANKING 

Harper  and  his  associates.  It  was  estimated  that  this  short 
interest  in  May  following  amounted  to  one  hundred  millions  of 
bushels,  and  made  up  what  was  called,  in  the  parlance  of  the  mar- 
ket, the  "shorts"  of  the  Chicago  "bears,"  and  the  "Farmer 
shorts,"  against  which  an  invisible  supply  was  held.  In  addition 
to  this,  all  the  markets  of  the  country,  as  well  as  the  foreign  oper- 
ators, were  reported  as  making  Chicago  the  dumping-ground  for 
their  short  sales. 

It  was  at  this  period  that  Harper  is  reported  to  have  begun 
his  bold  movement  to  corner  the  market,  and  in  this  desperate 
venture  to  have  staked  his  individual  fortune  and  all  the  available 
resources  of  the  Fidelity  National  Bank.  Who  his  associates 
were,  never  has  been  definitely  known,  and  it  was  not  even  known 
that  he  was  the  head  and  front  of  the  movement  until  the  corner 
collapsed.  The  brokers  through  whom  he  operated  were  well 
known,  but  the  principals  for  whom  they  were  operating  remained 
in  the  background.  It  was  known  that  large  orders  were  received 
from  brokers  in  Cincinnati,  but  it  was  not  known  whom  they 
represented. 

In  the  latter  part  of  April,  Harper  and  his  associates  were 
reported  as  having  carried  about  45,000,000  bushels  of  May 
wheat.  May  was  to  have  been  the  corner  month,  but  this  was 
found  to  be  impracticable,  and  it  was  decided  to  carry  the  corner 
over  to  June.  Thirty  million  bushels  of  May  wheat  were  sold 
and  about  the  same  amount  of  June  wheat  was  bought,  and  the 
Harper  interests  traded  the  remainder  of  their  May  wheat  for 
June  wheat,  paying,  it  was  said,  two  and  one-half  cents  a  bushel 
to  the  brokers  for  carrying  it.  The  thirty  million  bushels  of  June 
wheat  were  bought  at  eighty-two  and  eighty-four  cents  per 
bushel,  when  June  wheat  was  quoted  at  ninety-two  cents.  Early 
in  March  it  was  quoted  at  eighty  cents.  The  highest  price  reached 
was  ninety-four  and  three-quarters  cents. 

The  resources  of  the  Harper  combination  seemed  to  be  inex- 
haustible. Their  purchases  for  ten  consecutive  days  were  esti- 
mated at  a  million  bushels  a  dav.  This,  added  to  what  thev  al- 
ready  held,  made  their  total  holdings  75,000,000  bushels,  and  may 
have  exceeded  that  amount.  Harper  was  reported  as  employing 
three  million  dollars  in  carrying  this  wheat. 


ROMANCE  AND  TRAGEDY  OF  BANKING  143 

In  March,  some  Texas  capitalists  bought  about  two  million 
bushels  of  June  wheat  at  eighty  cents,  which  was  unloaded  on 
the  Harper  combination  at  eighty-five  and  seven-eighths  cents. 
Up  to  this  time  Harper  and  his  associates  had  made  some  sweep- 
ing operations  and  were  reported  as  having  made  considerable 
money.  Many  operators  who  sold  short  had  suffered  severely, 
and  the  retirement  of  one  large  New  York  house  from  active  busi- 
ness at  this  time  was  said  to  have  been  due  to  losses  sustained  in 
wheat.  In  the  meantime,  the  Harper  interests  continued  to  buy 
all  the  wheat  that  was  offered.  Their  nerve  seemed  to  be  as  un- 
daunted as  their  resources  appeared  to  be  inexhaustible. 

On  June  14  the  great  corner  collapsed.     Several  causes  con- 
tributed to  this  end.     It  appears  that  it  was  the  practice  for 
wealthy  farmers  to  sell  wheat  for  delivery  in  a  future  month  and 
hold  the  wheat  in  their  barns  against  the  sale.     When  there  was 
a  corner  in  the  market,  this  invisible  supply  was  brought  forth 
from  numerous  localities  until  all  the  warehouses  and  elevators 
recognized  by  the  board  of  trade  became  filled.     At  this  point, 
those  engaged  in  the  cornering  of  the  supply  had  their  firmest 
hold  upon  the  market.     Trains  and  boats  could  bring  in  wheat, 
but  unless  this  additional  grain  could  be  gotten  into  a  recognized 
warehouse  or  elevator  and  duly  inspected,  it  could  not  be  deliv- 
ered on  contract.     The  supply  of  cash  wheat  could  only  be  in- 
creased under  such  conditions  by  the  creation  of  additional  ware- 
houses and  elevators  and  their  recognition  by  the  board  of  trade. 
This  is  what  happened  in  Chicago,  and  was  one  of  the  chief  causes 
that  brought  about  the  collapse  of  the  Harper  corner.   The  board 
of  trade  not  only  recognized  new  elevators  and  warehouses  that 
had  been  filled  with  wheat,  and  declared  them  to  be  regular,  but 
it  was  proposed  to  make  track  grain  regular  also  when  it  was 
impossible  to  find  storage  room. 

The  stock  of  contract  wheat  in  Chicago  at  that  time  consisted 
of  15,512,700  bushels  No.  2  spring,  and  963,268  bushels  No.  2 
red.  If  the  board  of  trade  had  declared  track  grain  regular,  the 
Harper  combination  would  have  had  to  take  care  of  two  or  three 
million  bushels  more,  which  would  have  been  too  great  a  tax  upon 
its  resources.  At  this  time  New  York  operators  began  to  buy 
December  and  May  wheat  in  New  York    and    to    sell    July  and 


144  ROJVIANCE  AND  TRAGEDY  OF  BANKING 

August  wheat  in  Chicago.  This  movement  is  said  to  have  weak- 
ened the  Harper  combination  and  strained  its  resources  to  the 
breaking-point.  It  was  at  this  critical  stage  of  the  situation  that 
Harper  is  reported  to  have  conceived  the  scheme  of  unloading  his 
burden  on  his  broker  and  then  abandoning  him,  as  he  was  reported 
to  have  done  several  years  earlier  in  his  previous  dealings  in  the 
wheat  market.  At  any  rate,  the  broker  having  received  instruc- 
tions, placed  his  celebrated  order  to  buy  5,000,000  bushels  at 
ninety-three  cents,  and  3,300,000  bushels  were  sold  to  him,  it  was 
alleged,  by  Harper's  other  broker,  and  when  the  former  discov- 
ered the  situation,  he  called  his  representatives  out  of  the  pit  and 
stopped  the  buying. 

Another  contributing  cause  to  the  collapse  of  the  deal  was  the 
fact  that  several  of  the  New  York  banks  had  called  the  loans  to 
Harper  and  his  associates. 

When  the  market  broke  it  was  a  tremendous  crash.  Nothing 
approaching  it  had  ever  been  known  in  Chicago.  June  wheat 
broke  from  ninety-two  cents  to  seventy-two  cents,  and  July  wheat 
from  eighty-three  and  a  quarter  cents  to  seventy-four  cents. 
About  a  dozen  or  more  brokerage  houses  failed  and  the  entire 
market  was  involved  in  a  heavy  loss.  Harper  had  staked  every- 
thing he  possessed,  his  individual  wealth,  the  resources  of  the 
Fidelity  National  Bank,  his  reputation,  and  his  personal  liberty, 
upon  the  hazard  of  a  die  and  lost.  All  were  involved  in  the  suc- 
cess or  failure  of  the  greatest  wheat  speculation  that  ever  was 
known.  He  paid  the  penalty  for  his  misdeeds  in  connection  with 
the  misapplication  of  the  funds  of  the  bank  by  serving  a  term  in 
the  Ohio  penitentiary. 

Suggested  Amendments  to  the  Law 

In  his  first  annual  report  to  Congress  Mr.  Trenholm  sub- 
mitted a  number  of  suggestions  for  amendments  to  the  banking 
laws.  He  took  the  position  that  as  the  interests  of  the  Govern- 
ment in  connection  with  the  issue  and  redemption  of  the  circula- 
tion of  the  banks  were  fully  protected  and  the  noteholders  were 
absolutely  secured,  official  supervision  of  the  banks  was  reduced 
to  the  necessity  of  protecting  the  interests  of  depositors  and  cred- 
itors other  than  noteholders.     He  stated  that  as  the  security  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  145 

the  depositor  was  dependent  upon  the  proportion  of  the  bank's 
assets  to  its  liabilities  and  the  solidity  of  such  assets,  both  of 
which  were  in  turn  dependent  upon  the  management  of  the  bank, 
official  supervision  of  the  management  of  every  national  bank  by 
the  Comptroller  of  the  Currency  had  become  a  very  important 
and  necessary  feature  of  the  national  system.  For  this  reason  he 
was  of  the  opinion  that  the  laws  governing  supervision,  and  the 
character  of  the  business  that  may  be  done  by  the  banks,  should 
be  frequently  revised,  in  order  that  the  interests  of  both  may  be 
benefited  by  the  light  of  experience. 

That  such  revision  of  the  laws  was  not  made  from  time  to 
time  is  not  the  fault  of  the  Comptrollers,  nor  of  the  best  minds 
among  the  bankers.  Numerous  amendments  of  the  laws  had  been 
suggested  by  both,  the  adoption  of  some  of  which  have  no  doubt 
greatly  improved  the  system,  but  the  known  ambiguities  and 
inadequacies  of  many  of  the  most  important  provisions  of  the 
law  remained  unchanged  since  the  original  enactment,  until  in 
some  sections  of  the  country  it  had  become  almost  impossible  for 
banks  in  the  national  system  to  meet,  within  the  limitations  of 
law,  the  legitimate  business  demands  of  their  customers  in  com- 
petition with  the  best  class  of  State  institutions  operating  in  the 
same  locality. 

The  national  banking  laws  were  all  right  in  the  main,  but 
they  did  not  keep  pace  with  the  evolutions  of  business  and  bank- 
ing. Greater  latitude  to  the  banks  was  needed  in  some  respects ; 
increased  restrictions  in  others.  Had  the  necessary  changes  been 
made  in  the  law,  as  recommended  from  time  to  time  by  Comp- 
trollers, the  national  system  would  have  been  steadily  improved, 
both  in  the  interests  of  the  banks  and  the  better  security  of  their 
depositors. 

Mr.  Trenholm,  like  all  of  his  predecessors,  readily  recognized 
the  defects  in  the  banking  statutes  and  endeavored  to  have  them 
corrected.  In  his  first  annual  report  he  submitted  a  number  of 
specific  recommendations  for  amendments  to  the  law,  the  most 
important  of  which  were  the  following : 

That  the  limitations  with  respect  to  the  dealings  of  the  banks 
in  real  estate  and  real  estate  mortgages  be  more  clearly  and  defi- 
nitely expressed,  and  a  penalty  provided  for  violation  of  the  law. 


146  ROMANCE  AND  TRAGEDY  OF  BANKING 

That  not  less  than  five  directors  of  a  bank,  exclusive  of  the 
vice-president  and  cashier,  be  required,  when  such  officers  were 
members  of  the  board. 

That  the  shareholders  of  the  bank  be  exempted  from  further 
liability  when  the  surplus  of  the  association  should  exceed  twenty 
per  cent,  of  the  paid-in  capital  stock  of  the  bank. 

That  the  banks  be  required  to  keep  on  hand,  or  at  some  nearby 
center,  a  larger  proportion  of  reserve  than  was  then  required  by 
existing  law. 

That  the  banks  be  permitted  to  exceed  the  limit  placed  upon 
loans  when  security  of  undoubted  value  was  held  for  a  loan,  which 
security  was  not  in  any  way  dependent  for  its  ready  convert- 
ibility upon  the  borrover. 

That  the  compensation  of  bank  examiners  be  based  upon  the 
aggregate  liabilities  of  the  bank,  instead  of  upon  capital  stock, 
and  that  the  appointment  of  supervising  examiners  be  authorized, 
to  be  paid  out  of  the  Treasury  of  the  United  States. 

That  the  assistant  cashier  of  a  bank  be  authorized,  in  the 
absence  or  inability  of  the  cashier,  to  sign  all  certificates  then 
required  to  be  signed  by  the  cashier. 

That  provision  be  made  for  the  protection  of  the  rights  of 
shareholders  desiring  to  withdraw  from  national  banks  extending 
their  corporate  existence. 

In  his  report  for  1887,  Mr.  Trenholm  recommended  a  revision 
of  the  entire  National  Bank  Act,  and  embodied  his  views  in  the 
form  of  a  prepared  bill,  containing  242  sections,  codifying  exist- 
ing laws,  with  such  modifications  and  additional  provisions  as  he 
deemed  essential. 

In  his  third  and  last  annual  report,  Mr.  Trenholm  called  at- 
tention to  the  gradual  and  continuous  contraction  in  national 
bank  circulation  that  had  taken  place  during  the  preceding  ten 
years.  He  stated  that  the  influences  principally  responsible  for 
such  contraction  were  the  refunding  operations  of  the  Treasury 
Department  in  United  States  bonds,  the  growing  scarcity  and 
high  price  of  the  bonds,  the  resumption  of  specie  payments  in 
January,  1879,  made  possible  only  by  the  co-operative  relations 
between  the  Treasury  Department  and  the  national  banks,  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  147 

displacement  of  national  bank  notes  by  other  forms  of  money, 
the  silver  coinage  law  of  1878,  providing  for  the  coinage  of  two 
millions  of  silver  dollars  a  month,  and  the  silver  certificates  auth- 
orized by  the  Act  of  August  4,  1886,  which  were  absorbed  by  the 
public  because  they  constituted  the  only  supply  of  notes  of  small 
denominations. 

While  all  these  influences,  Mr.  Trenholm  declared,  had  the 
effect  of  increasing  the  total  volume  of  money  in  circulation 
$660,000,000-  between  January,  1879,  and  October,  1888,  the 
date  of  his  report,  the  national  bank  circulation  during  the  same 
period  showed  a  shrinkage  of  nearly  $83,500,000. 

Heterogeneous  Currency  System 

Mr.  Trenholm  regarded  the  greenbacks,  or  United  States 
notes,  as  the  frailest  element  in  our  heterogeneous  currency  sys- 
tem, and  in  classifying  the  money  of  the  country  in  the  order  of 
its  value,  placed  the  gold  coin  and  gold  certificates  first,  the 
national  bank  circulation  second,  silver  coin  and  silver  certifi- 
cates next,  and  the  greenbacks  last,  and  suggested  that  it  would 
be  of  great  benefit  to  the  whole  mass  of  our  currency  if  the  green- 
backs could  be  eliminated  and  national  bank  notes  substituted  in 
their  place. 

He  then  recommended  the  retirement  of  the  $346,000,000  of 
greenbacks  by  funding  the  debt  into  bonds,  or  so  much  of  it  as 
should  be  presented  at  the  Treasury  within  a  limited  period.  Such 
bonds  were  to  be  issued  to  national  banks  only  in  exchange  for 
greenbacks,  and  were  to  bear  a  low  rate  of  interest,  not  exceeding 
two  and  one-half  per  cent.  These  bonds  were  to  mature  only 
upon  the  failure  or  liquidation  of  the  banks  owning  them,  and  be 
available  only  as  security  for  national  bank  circulation.  The 
banks  were  to  be  required  to  retain  on  deposit  with  the  Treas- 
urer of  the  United  States  other  bonds  to  the  minimum  amount 
provided  by  existing  laws,  and  to  use  the  new  bonds  only  for  pro- 
curing additional  circulation,  or  in  substitution  for  other  bonds 
on  deposit  in  excess  of  the  minimum,  but  the  new  bonds  were  to 
be  available  for  all  purposes  by  banks  organized  after  the  passage 
of  the  Act. 


148  ROMANCE  AND  TRAGEDY  OF  BANKING 

He  recommended  the  transfer  of  the  National  Bank  Redemp- 
tion Agency  from  Washington  to  New  York  City,  and  the  crea- 
tion of  a  sub-agency  at  each  central  reserve  city,  the  notes  of  all 
the  banks  wherever  located  to  be  redeemed  at  whichever  agency 
they  should  be  presented.  He  then  expressed  his  views  at  length 
in  support  of  these  suggestions  and  the  belief  that  the  retirement 
of  the  greenbacks  would  restore  the  national  banking  system  to 
healthy  activity  and  stimulate  it  to  fresh  growth  in  sections  of 
the  country  where  national  banks  were  most  needed. 


Amendments  to  the  Law 

During  Mr.  Trenholm's  administration  four  amendments  to 
the  national  banking  laws  were  passed,  as  follows : 

The  Act  of  May  1,  1886,  providing  that  any  national  bank- 
ing association  might  by  a  vote  of  its  shareholders  owning  two- 
thirds  of  the  stock,  and  with  the  approval  of  the  Comptroller, 
increase  its  capital  to  any  sum  approved  by  the  Comptroller, 
notwithstanding  the  limit  fixed  in  its  original  articles  of 
association. 

This  Act  also  provided  that  any  association  might  change  its 
name  or  place  where  its  operations  were  carried  on  to  any  other 
place  within  the  same  State  not  more  than  thirty  miles  distant, 
with  the  approval  of  the  Comptroller  and  by  the  vote  of  share- 
holders owning  two-thirds  of  the  stock. 

Until  the  passage  of  this  Act,  if  a  bank  desired  to  remove  its 
place  of  business  or  change  its  name,  it  was  necessary  in  every 
instance  to  obtain  a  special  Act  of  Congress. 

The  Act  of  March  3,  1887,  defined  the  jurisdiction  of  Circuit 
Courts  of  the  United  States  and  declared  that  all  national  banks 
were  to  be  deemed  citizens  of  the  States  in  which  they  were  re- 
spectively located,  and  that  the  Circuit  and  District  Courts  of 
the  United  States  should  not  have  jurisdiction  other  than  such 
as  they  would  have  in  cases  between  individual  citizens  of  the 
same  State. 

Prior  to  the  passage  of  this  Act  the  United  States  Courts 
had  jurisdiction  in  all  cases  in  which  national  banks  were  a  party. 


ROMANCE  AND  TRAGEDY  OF  BANKING  149 

The  Act  of  March  3,  1887,  provided  for  the  creation  of  addi- 
tional reserve  cities  on  application  of  three-fourths  in  number 
of  the  national  banks  located  in  any  city  having  a  population  of 
fifty  thousand  people,  and  made  the  same  provision  for  the  crea- 
tion of  additional  central  reserve  cities.  The  latter,  however, 
required  the  approval  of  the  Secretary  of  the  Treasury. 

The  Act  of  August  13,  1888,  simply  determined  the  jurisdic- 
tion of  the  Circuit  Courts  of  the  United  States,  and  as  far  as  the 
national  banks  were  concerned,  made  no  change  in  the  Act  of 
March  3,  1887. 


EDWARD  S.  LACEY 
Comptroller  of  the  Currency,  1889- 1892 


CHAPTER  IX 

Edward  S.  Lacey 

UPON  the  resignation  of  Mr.  Trenholm,  President  Cleveland, 
a  few  weeks  before  the  close  of  his  first  term,  nominated 
the  Deputy  Comptroller  of  the  Currency,  Jesse  D.  Abra- 
hams, to  be  Comptroller,  but  the  Senate  took  no  action  on  the 
nomination,  and  the  office  remained  vacant  until  May  1,  1889, 
when  Edward  S.  Lacey,  of  Michigan,  was  appointed  Comptroller 
by  President  Benjamin  Harrison. 

Mr.  Lacey,  the  seventh  Comptroller  of  the  Currency,  was  born 
at  Chili,  N.  Y.,  November  26,  1835.  He  removed  to  Michigan  in 
1842,  and  was  educated  at  the  public  schools  and  at  Olivet  Col- 
lege. He  was  elected  Register  of  Deeds  of  Charlotte,  Mich.,  in 
1860,  and  was  re-elected  in  1862.  He  was  trustee  of  the  Michi- 
gan State  Insane  Asylum  from  1874  to  1880,  and  was  a  delegate 
to  the  Republican  National  Convention  in  1876.  He  was  elected 
a  Representative  from  the  Third  District  of  Michigan  to  the 
Forty-seventh  and  Fort^^-eighth  Congresses.  Previous  to  his  ap- 
pointment as  Comptroller  he  had  had  a  practical  banking  experi- 
ence of  twenty-five  years,  and  at  the  time  of  his  appointment  was 
president  of  the  First  National  Bank  of  Charlotte,  Mich.,  which 
he  assisted  in  organizing  in  1870,  and  was  its  first  cashier.  He 
resigned  the  office  of  Comptroller  on  June  30,  1892,  to  become 
president  of  the  Bankers  National  Bank  of  Chicago,  which  he 
organized,  and  continued  to  be  its  president    until    August    31, 

1909,  when  this  bank  was  merged  with  the  Commercial  National 
Bank  of  Chicago.  George  E.  Roberts,  president  of  the  latter 
institution,  was  made  president  of  the  consolidated  bank,  and  Mr. 
Lacey  was  made  chairman  of  the  board  of  directors.    On  July  30, 

1910,  the  Commercial  National  Bank  was  merged  with  the  Conti- 
nental National,  under  the  title  of  the  Continental  and  Commer- 
cial National  Bank,  and  Mr.  Lacey  continued  his  connection  with 
this  institution  as  a  director  and  chairman  of  the  advisory  com- 

161 


152  ROJ^IANCE  AND  TRAGEDY  OF  BANKING 

mittee  of  the  board  until  the  date  of  his  death,  October  2,  1916, 
at  Evanston,  111. 

Mr.  Lacey  came  to  the  office  of  Comptroller  of  the  Currency 
thoroughly  equipped  for  the  discharge  of  its  responsible  and 
onerous  duties,  not  only  as  a  practical  banker,  but  as  an  experi- 
enced legislator.  He  was  a  man  of  reserved  disposition,  extremely 
cautious  and  ultra-conservative;  scrupulously  conscientious  in 
the  discharge  of  his  duties  and  in  every  business  detail,  slow  in 
bestowing  his  confidences,  but  unlimited  in  his  trust  when  once 
his  confidence  was  obtained. 


Monetary  Stringency  of  1890 

The  second  year  of  Mr.  Lacey's  incumbency'  of  the  office  of 
Comptroller  was  marked  by  the  monetary  stringency  of  1890, 
the  approach  of  which  was  plainly  manifest  in  the  early  spring 
of  that  year. 

In  commenting  upon  the  conditions  which  existed  throughout 
the  country  immediately  preceding  the  culmination  of  this  strin- 
gency, Mr.  Lacey,  in  his  annual  report  to  Congress  for  1890, 
stated  that  the  agricultural  interests  were  in  an  unsatisfactory 
condition  and  that  ovei'trading  and  unhealthful  expansion  were 
apparent  everywhere.  The  activity  in  railroad  development 
forced  upon  the  markets  large  lines  of  securities.  Attractive 
investments  in  real  estate,  farm  mortgages,  manufacturing  opera- 
tions, stocks  and  bonds  of  electric,  water  and  light  power  plants, 
and  many  other  lines  of  industry,  drew  large  amounts  of  capital 
theretofore  loanable  in  the  East  from  the  Atlantic  Coast  States 
to  the  Middle  West  and  Pacific  Coast,  and  likewise  from  abroad. 
This,  Mr.  Lacey  stated,  not  only  largely  depleted  the  Atlantic 
States  of  the  capital  necessary  to  carry  on  manufacturing  and 
other  legitimate  enterprises  of  that  section,  but  had  the  effect  of 
unduly  stimulating  speculative  operations  in  the  West  and  of 
laying  the  foundation  for  the  collapse  in  prices  and  values  which 
followed  when  the  inflow  of  capital  was  arrested  or  ceased  to  be 
available.  As  a  result,  the  banks  in  these  sections  became  more 
or  less  involved  through  their  customers,  and  so  badly  extended 


ROMANCE  AND  TRAGEDY  OF  BANKING  153 

as  to  compel  them  to  rediscount  heavily  with  their  reserve  city 
correspondents  in  order  to  carry  the  burden. 

Similar  conditions,  Mr.  Lacey  stated,  of  undue  expansion  ex- 
isted abroad,  and  in  anticipation  of  a  monetary  stringency  in 
England,  large  amounts  of  American  securities  held  by  European 
investors  were  forced  upon  the  New  York  market.  The  failure 
of  the  Panama  Canal  Company  and  the  French  Copper  Company 
had  already  forced  the  continental  countries  of  Europe  through 
a  period  of  liquidation  and  loss. 

During  the  months  of  June,  July  and  August  of  1890,  the 
net  exportations  of  gold  and  bvillion  from  the  United  States  ex- 
ceeded fourteen  millions  of  dollars,  and  from  January,  1890,  to 
August,  1891,  the  gold  exportations  amounted  to  over  seventy- 
five  millions. 

Between  February  and  May,  1890,  the  gross  deposits  of  the 
forty-six  banks  in  New  York  City  fell  off  nearly  forty-five  mil- 
lions of  dollars,  due  to  the  demands  of  the  interior  banks. 

This  stringency  culminated  about  the  middle  of  November  in 
New  York,  by  the  failure  of  J.  C.  Wallcott  &  Company,  a  leading 
brokerage  firm,  and  the  North  River  Bank,  a  State  institution. 
The  Bank  of  North  America  became  involved,  and  at  the  same 
time  announcement  was  made  of  the  embarrassment  of  Baring 
Brothers  &  Company,  of  London,  whose  obligations  were  guaran- 
teed to  the  extent  of  seventy-five  millions  of  dollars  by  a  syndi- 
cate headed  by  the  Bank  of  England.  Other  failures  followed, 
both  in  New  York  and  Philadelphia. 

The  unfavorable  conditions  in  the  United  States  were  height- 
ened by  the  greatly  reduced  yield  of  wheat,  oats  and  corn  and  the 
prevailing  low  prices  for  these  commodities.  The  new  tariff  law 
which  went  into  effect  in  October,  1890,  also  operated  as  a  dis- 
turbing factor  by  stimulating  importations  in  anticipation  of  the 
higher  duties  imposed  by  the  Act. 

The  available  surplus  in  the  Treasury  of  the  United  States 
was  almost  completely  exhausted  in  an  endeavor  on  the  part  of 
the  Secretary  to  relieve  the  monetary  stringency,  and  over  ninety 
million  dollars  of  Government  funds  were  disbursed  between  July 
and  November,  1890,  by  the  purchase  of  United  States  bonds  and 
the  payment  of  interest  thereon.    As  is  usual  in  periods  of  raone- 


154  KOIVIANCE  AND  TRAGEDY  OF  BANKING 

tarj  stringency,  the  banks  of  the  metropolitan  cities  were  subject 
to  pressing  demands  for  relief  and  the  Clearing  House  Associa- 
tions of  New  York,  Philadelphia  and  Boston  were  compelled  to 
have  recourse  to  the  expedient  so  successfully  resorted  to  during 
the  panics  of  1873  and  1884,  of  issuing  Clearing  House  loan  cer- 
tificates. This  action,  together  with  the  large  disbursements  of 
the  United  States  Treasury,  contributed  greatly  toward  relieving 
the  situation  and  the  restoration  of  confidence,  which,  after  all, 
is  more  essential  and  effective  in  bringing  about  a  return  to  nor- 
mal conditions  than  any  increase  in  the  circulating  medium. 

The  amount  of  Clearing  House  certificates  issued  by  the  New 
York  Clearing  House  Association  aggregated  $16,645,000;  by 
the  Boston  Clearing  House  Association,  $5,065,000,  and  by  the 
Philadelphia  Clearing  House  Association,  $8,870,000. 

While  the  severity  of  this  monetary  disturbance  passed  away 
to  a  considerable  extent  with  the  close  of  the  year  1890,  especially 
in  the  larger  cities,  its  effect  upon  the  country  at  large  continued 
throughout  the  following  year,  and,  as  Mr.  Lacey  said,  in  closing 
his  comments  upon  the  causes  which  led  to  the  disturbance,  the 
process  of  liquidation  continued  and  was  reflected  in  the  arrest  of 
a  multitude  of  contemplated  operations,  the  abandonment  of 
projects,  the  annulment  or  suspension  of  innumerable  contracts, 
the  curtailment  of  business  in  general  and  widespread  depression 
and  stagnation,  which  had  an  intimate  bearing  upon  the  bank  and 
business  failures  which  followed  in  1891. 

Although  Mr.  Lacey  accurately  described  the  conditions 
which  led  to  this  monetary  disturbance,  what  he  believed  to  be  the 
passing  away  of  the  financial  storm  was  simply  a  temporary  lull 
in  its  fury,  the  full  force  of  which  did  not  sweep  over  the  country 
until  1893,  a  little  more  than  a  year  after  he  had  retired  from 
the  office  of  Comptroller. 

National  Bank  Failures  During  Comptroller  Lacey's 

Administration 

During  the  three  years  and  one  month  of  Mr.  Lacey's  term 
as  Comptroller,  there  were  one  hundred  and  thirty-eight  failures 
of  national  banks.     Ninety-one  of  these  went  into  voluntary  liqui- 


ROMANCE  AND  TRAGEDY  OF  BANKING  155 

dation  after  closing  their  doors;  forty-seven  were  placed  in  the 
hands  of  receivei's,  and  one  of  the  latter  was  permitted  to  resume 
business,  having  been  restored  to  solvency. 

As  far  as  the  records  of  the  Comptroller's  office  show,  only 
one  bank  prior  to  1891  was  permitted  to  reopen  and  resume  busi- 
ness after  being  placed  in  the  hands  of  a  receiver. 

There  were  more  national  bank  failures  in  1891  than  during 
any  previous  year  in  the  history  of  the  national  banking  system. 
The  most  important  of  these  failures,  and  those  that  attracted 
the  greatest  attention,  were  the  Keystone  and  Spring  Garden 
National  Banks  of  Philadelphia,  and  the  Maverick  National  Bank 
of  Boston,  Mass.,  which  were  closed  March  20,  May  8  and  Octo- 
ber 31,  1891,  respectively,  and  were  placed  in  the  hands  of  re- 
ceivers. May  9,  May  21  and  November  2,  1891,  respectively. 

Between  the  dates  of  closing  of  these  institutions  and  the  ap- 
pointment of  receivers  these  banks  were  in  charge  of  national 
bank  examiners.  It  was  the  practice  of  the  Comptroller's  office 
at  that  time,  and  previously,  and  for  some  time  subsequent 
thereto,  when  a  bank  was  closed  to  place  an  examiner  in  charge 
of  its  affairs  to  ascertain  and  report  its  true  condition,  collect 
maturing  notes,  list  and  classify  its  assets  and  determine  its  lia- 
bilities. A  receiver  was  not  appointed  until  it  was  definitely  known 
that  there  was  no  possibility  of  the  bank  being  able  to  resume 
business.  Under  this  practice,  closed  banks  were  allowed  to  re- 
main in  charge  of  bank  examiners  for  weeks,  and  in  some  cases 
months,  before  a  receiver  was  appointed.  This  practice  contin- 
ued until  it  was  held  by  the  courts  that  Section  5240  of  the  Re- 
vised Statutes  of  the  United  States,  prohibiting  any  attachment, 
injunction  or  execution  against  a  national  bank  before  final  judg- 
ment, applied  only  to  insolvent  national  associations,  and  that 
insolvency  was  not  determined  until  a  receiver  was  appointed.  It 
was  held  that  while  property  of  the  failed  bank  in  the  hands  of  a 
receiver  was  not  attachable,  in  the  hands  of  a  bank  examiner  it 
was  attachable. 

This  position  was  subsequently  overruled  by  the  Supreme 
Court  of  the  United  States,  but  the  decision  of  the  lower  court 
led  to  a  discontinuance  of  the  administrative  policy  of  placing  a 
bank  examiner  in  charge  of  a  failed  association  for  an  indefinite 


156  ROMANCE  AND  TRAGEDY  OF  BANKING 

period,  and  the  adoption  of  the  practice  of  appointing  the  exam- 
iner receiver  temporarily  immediately  upon  the  closing  of  the 
bank,  in  order  to  avoid  any  question  in  regard  to  the  examiner's 
legal  status  or  the  status  of  the  failed  bank  in  his  hands. 

A  bank  examiner  in  charge  of  a  suspended  or  failed  national 
bank  is  charged  with  certain  important  responsibilities,  but  his 
powers  are  circumscribed  and  he  has  no  legal  status,  as  the  law 
makes  no  provision  for  such  a  contingency.  He  can  transact  no 
business,  nor  pay  out  any  money.  His  duty  is  to  collect  and  pro- 
tect maturing  paper,  keeping  the  proceeds  of  collections  separate 
from  the  cash  in  the  bank  at  the  date  of  suspension  or  failure.  He 
can  make  no  entries  on  the  bank's  books,  but  must  keep  the  assets 
intact  as  they  existed  at  the  date  of  suspension.  He  must  advise 
all  correspondent  banks  immediately  of  the  suspension  of  the 
association  and  to  withhold  the  payment  of  outstanding  drafts. 
His  principal  duty  is  to  list  and  classify  the  assets  coming  inta 
his  hands  when  he  took  charge,  under  the  headings  of  good,  doubt- 
ful and  worthless,  and  thus  determine  as  accurately  as  possible 
the  resources  of  the  association.  In  brief,  he  must,  by  a  speedy, 
intelligent  and  thorough  examination  of  the  bank  bring  order  out 
of  the  chaotic  conditions  generally  found  to  exist  after  failure 
occurs  and  turn  over  to  the  receiver,  when  appointed,  a  complete 
and  detailed  list  of  the  assets,  and,  as  fully  as  possible,  the  liabili- 
ties of  the  association. 


Failure  of  the  Keystone  National  Bank 

The  Keystone  National  Bank  was  originally  a  State  institu- 
tion, doing  business  under  the  title  of  the  Keystone  Bank  of  Phil- 
adelphia. It  was  converted  into  a  national  association  July  30, 
1875,  with  C.  M.  Clingan,  president,  and  J.  E.  Wisnell,  cashier. 
The  board  of  directors  at  the  time  of  conversion  consisted  of 
C.  M.  Clingan,  Thomas  Lewis,  Thomas  Allman,  J.  C.  Lucas,  Wil- 
liam Armstrong,  H.  J.  Crump  and  Irwin  H.  Torrence.  J.  C. 
Lucas  was  made  president  of  the  bank  in  June,  1880,  and  contin- 
ued as  such  until  the  date  of  his  death. 

A  short  time  before  the  failure  of  the  institution  an  examina- 
tion disclosed   that    it   had    sustained   losses    sufficient   to   badly 


ROMANCE  AND  TRAGEDY  OF  BANKING  157 

impair  its  capital.  An  assessment  of  the  stock  was  ordered  by 
the  Comptroller  to  make  good  the  impairment,  but  the  stock- 
holders were  unable  to  respond.  On  or  about  March  18,  1891, 
the  president  of  the  bank,  Gideon  W.  Marsh,  called  upon  the 
Comptroller  in  Washington  for  a  conference  in  regard  to  the 
condition  of  the  association.  As  a  result  of  the  disclosures  at 
this  conference,  the  Comptroller  instructed  the  bank  examiner  to 
close  and  take  possession  of  the  bank  the  following  morning, 
March  19,  1891.  Subsequent  investigation  revealed  the  most 
reckless  and  criminal  use  of  the  bank's  funds  by  the  president, 
aided  and  abetted  by  some  of  the  employees.  It  developed  that 
the  general  bookkeeper  had  aided  the  president  in  deceiving  the 
examiner  by  false  entries  made  at  or  about  the  time  the  bank  was 
due  for  examination.  After  his  conference  with  the  Comptroller 
in  Washington,  the  president  of  the  bank  absconded,  and  after 
suspension  the  bookkeeper  was  immediately  arrested. 

According  to  the  story  of  this  bookkeeper,  it  appears  that  he 
first  entered  the  bank  in  1880  as  a  general  utility  boy,  when  Lucas 
was  president.  Shortly  afterward  he  was  placed  in  charge  of  one 
of  the  ledgers,  in  addition  to  being  given  work  of  a  minor  char- 
acter. Later  he  was  made  general  bookkeeper,  and  in  January, 
1890,  he  was  appointed  assistant  cashier,  at  the  same  time  re- 
taining his  position  as  general  bookkeeper.  His  salary  was  ad- 
vanced gradually  until  it  reached  the  sum  of  two  thousand  dol- 
lars per  annum.  A  few  months  after  assuming  the  duties  of  book- 
keeper, he  stated,  he  was  instructed  by  President  Lucas  to  make 
a  false  entry  in  the  individual  ledger,  but  he  claimed  that  at  the 
time  he  did  so  he  did  not  know  that  there  was  anything  wrong  in 
the  act  or  in  the  direction  of  the  president  for  him  to  make  the 
entry.  This  entry,  he  stated,  was  for  the  purpose  of  covering  up 
an  overdraft  in  Mr.  Lucas's  account  of  about  $5000,  and  was 
made  a  day  or  two  prior  to  an  examination  of  the  bank  by  the 
national  bank  examiner,  and  after  the  examination  he  altered  the 
books  by  direction  of  the  president,  to  conform  to  the  facts.  He 
stated  that  he  did  not  know  whether  this  transaction  was  the  com- 
mencement of  the  irregularities  in  the  bank's  books  or  not,  but 
was  inclined  to  believe  that  the  president  had  carried  checks  m 
the  paying  teller's  cash  drawer  which  were  counted  as  cash  prior 


158  ROIVIANCE  AND  TRAGEDY  OF  BANKING 

to  this  time.     Mr.  Marsh  was  at  that  time  paying  teller  as  well 
as  cashier. 

He  was  unable  to  state  how  rapidly  the  overdraft  of  the  presi- 
dent increased,  but  he  was  under  the  impression  that  the  account 
never  was  made  good  from  that  time  to  the  date  of  closing  the 
bank,  but  that  it  grew  larger  and  larger  until  it  reached  the  sum 
of  $330,000.  This  overdraft,  he  stated,  was  never  allowed  to 
appear  on  the  ledger,  the  lai'ger  figures  being  dropped  altogether. 
This,  of  course,  threw  the  ledger  out  of  balance,  and  in  order  to 
make  it  balance  at  the  time  of  the  bank  examiner's  examinations, 
a  sufficient  amount  was  deducted  from  the  various  accounts  in 
the  ledger  to  equalize  the  overdraft.  There  were  other  over- 
drafts, he  stated,  which  were  covered  in  the  same  way,  the  bulk  of 
which  were  in  the  accounts  of  the  president,  who  was  interested 
in  some  real  estate  investments  at  Spring  Lake  and  Sea  Girt, 
N.  J.,  with  Lucas  &  Brother,  William  Lucas  and  H.  H.  Yard. 

These  transactions,  he  said,  occurred  mainly  in  the  ledger  of 
which  he  had  charge,  but  when  the  overdrafts  became  so  large 
that  a  sufficient  amount  could  not  be  safely  taken  from  accounts 
in  one  ledger  to  make  up  the  deficiency,  recourse  was  had  to  other 
ledger  accounts.  In  this  manner  the  ledger  summaries  had  to  be 
altered  to  a  corresponding  amount.  In  other  words,  if  fifty  thou- 
sand dollars  of  credit  balances  were  taken  from  the  first  ledger 
the  amount  called  for  by  the  summary  of  that  ledger  had  to  be 
diminished  by  fifty  thousand  dollars,  and  if  these  balances  were 
placed  to  the  credit  of  the  president  in  the  second  ledger  the  sum- 
mary of  that  ledger  had  to  be  increased  by  that  amount. 

The  assistant  cashier  stated  that  these  irregularities  were  the 
only  kind  that  he  was  closely  identified  with,  or  rather  in  the  mak- 
ing of  which  he  was  the  prime  factor,  acting  under  the  directions 
of  the  president  of  the  bank.  He  stated  that  he  was  kept  at  this 
kind  of  work  even  after  he  was  placed  in  charge  of  the  general 
ledger,  making  the  alterations  usually  at  night  or  late  in  the 
afternoon.  He  stated  that  he  had  known  the  president  of  the 
bank  to  go  to  the  paying  teller's  drawer  and  take  out  a  handful 
of  notes,  count  them  and  say  to  the  teller:  "I  have  ten  thousand 
dollars,  for  which  I  will  give  you  a  check  in  a  few  minutes,"  but 
the  check  was  never  given,     A  memorandum  was  carried  in  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  159 

cash  by  the  teller  foi'  the  amount.  This,  he  said,  was  done  with 
the  receiving  teller's  cash,  but  the  receiving  teller  always  passed 
his  memorandum  over  to  the  paying  teller  in  his  daily  settlements. 
The  old  banking  house  of  the  association,  he  stated,  was  owned 
by  President  Lucas,  although  he  was  quite  sure  in  his  own  mind 
that  it  was  purchased  with  money  taken  directly  from  the  bank. 
The  new  banking  house  was  built  with  the  bank's  money.  He 
stated  that  he  had  known  the  president  to  buy  up  various  bank- 
rupt concerns  and  carry  on  the  business  himself,  placing  a  man- 
ager in  charge.  He  had  seen  the  vaults  and  cellars  of  the  old 
bank  stocked  with  imported  wines,  Bibles,  etc.,  and  cases  of  silver- 
ware purchased  from  the  bankrupt  concerns.  Whatever  money 
was  lost  in  these  concerns,  the  bank  had  to  bear.  Whatever  was 
received  from  the  sales  of  such  wares  was  generally  placed  to  the 
personal  credit  of  President  Lucas. 

The  discrepancy  of  $200,000,  which  was  found  to  exist  in  the 
bills  discounted  account,  he  stated,  was  caused  by  the  discount 
of  too  many  notes  from  time  to  time  for  the  various  accounts 
which  the  president  managed  in  connection  with  the  Sea  Girt  and 
Spring  Lake  properties,  which  notes  were  abstracted  and  de- 
stroyed and  marked  paid  on  the  books,  and  when  examinations 
were  expected,  fictitious  notes  were  substituted  and  carried 
through  the  books,  as  if  they  had  at  some  prior  time  been  dis- 
counted and  carried  through  in  the  ordinary  way. 

He  stated  that  H.  H.  Yard's  account  was  overdrawn  as  much 
as  $275,000  and  that  he  was  so  closely  identified  with  President 
Lucas  as  to  make  it  impossible  to  distinguish  between  them  in 
their  transactions  with  the  bank. 

The  greatest  trouble  that  the  bank  encountered  was  in  its  deal- 
ings with  the  Clearing  House.  The  bank  was  constantly  indebted 
to  this  association,  and  as  this  indebtedness  had  to  be  met  daily 
at  twelve  o'clock,  any  means  and  every  means  was  resorted  to  to 
raise  the  funds  required.  Every  place  where  the  bank  could  get 
credit,  it  would  borrow  for  periods  of  varying  length,  generally 
from  day  to  day.  In  the  hurry  and  stress  with  which  these  loans 
were  effected,  there  was  much  done  of  which  no  record  was  made. 
This  occasioned  no  end  of  trouble  in  settling  accounts  at  the  close 
of  the  day.    A  number  of  loans  were  made  to  the  bank  by  some  of 


160    ROMANCE  AND  TRAGEDY  OF  BANKING 

the  other  banks  for  comparatively  long  periods  which  were  re- 
newed from  time  to  time,  and  no  record  was  made  on  the  books  of 
the  bank  of  such  liabilities.  When  large  deposits  were  made,  espe- 
cially in  new  accounts,  or  when  certificates  of  deposit  were  issued, 
Cashier  Marsh,  it  was  alleged,  would  retain  the  deposit  ticket  in 
his  desk  and  rush  off  with  the  funds  to  pay  a  loan,  or  part  of  a 
loan  that  was  due  or  past  due,  and  the  deposit  ticket  was  not  seen 
again  for  several  days,  if  ever.  When  checks  were  received  against 
such  deposits,  or  when  the  certificates  were  presented  for  pay- 
ment, no  funds  were  to  the  credit  of  the  accounts  to  meet  them, 
and  in  order  to  straighten  out  such  accounts  false  entries  were 
resorted  to. 

On  various  occasions  the  Clearing  House  Committee  made  ob- 
jection to  the  bank's  line  of  discounts,  protesting  that  it  was  too 
large,  or  that  the  reserve  was  too  low,  or  that  the  foreign  reserve 
was  out  of  proportion  to  the  home  reserve.  When  such  objections 
were  raised,  arbitrary  changes  were  made  in  these  accounts,  in- 
creasing or  diminishing  the  balances  to  adjust  proportions.  So 
many  alterations  and  realterations  were  made  in  the  bank's  books 
that  it  was  difficult  in  many  cases  to  separate  the  false  from  the 
genuine  entries. 

J.  C.  Lucas,  the  president  of  the  bank,  who,  the  assistant 
cashier  claimed,  was  responsible  for  his  wrong-doing,  died  before 
the  bank  failed,  and  G.  W.  Marsh,  the  cashier,  was  made  presi- 
dent. Marsh  was  indicted  in  1891  for  wilfully  misapplying  the 
funds  of  the  association,  and  was  also  indicted  with  Charles  Law- 
rence, the  assistant  cashier,  for  making  false  entries  in  the  books 
of  the  bank.  Lawrence  was  also  indicted  separately  for  making 
false  entries.  After  the  failure  of  the  bank  Marsh  absconded  and 
was  a  fugitive  from  justice  for  several  years,  but  he  returned  in 
December,  1898,  pleaded  guilty  to  the  indictments  and  was  sen- 
tenced to  a  term  in  the  penitentiary.  Lawrence  pleaded  guilty 
in  1891  and  was  also  sentenced  to  the  penitentiary. 

The  total  book  value  of  the  assets  of  this  bank  at  the  time  of 
failure  was  $1,864,795.  The  losses  on  assets  compounded  or  sold 
by  the  receiver  under  order  of  the  court  were  $1,429,122.  The 
stockholders  were  assessed  one  hundred  per  cent.,  or  $500,000. 
Of  this  amount  $241,511  was  collected,  and  the  total  collections 


ROMANCE  AND  TRAGEDY  OF  BANKING  161 

from  all  sources  amounted  to  $580,396.  Eighteen  per  cent,  divi- 
dends were  paid  to  depositors  and  other  creditors,  or  $147,748, 
and  the  receivership  was  finally  closed  January  31,  1902. 

After  the  closing  of  this  association  and  before  its  affairs  were 
placed  in  the  hands  of  a  receiver,  efforts  were  made  by  some 
prominent  Philadelphians  and  stockholders  of  the  bank  to  raise 
sufficient  funds  by  voluntary  subscription  to  restore  the  bank  to 
solvency  and  resume  business  under  an  entirely  new  board  of 
directors  and  officers,  but  when  it  was  discovered  that  the  bank 
had  been  completely  looted  by  some  of  its  officers  all  efforts  to 
revive  it  were  abandoned  and  a  receiver  became  necessary  to  wind 
up  its  affairs. 

Failure  of  the  Spring  Garden  National  Bank 

The  failure  of  the  Spring  Garden  National  Bank  followed 
closely  upon  that  of  the  Keystone  National.  This  bank  was  also 
originally  a  State  institution,  doing  business  under  the  title  of 
The  Spring  Garden  Bank  of  Philadelphia.  It  was  converted  into 
a  national  association  March  13,  1886.  The  immediate  cause  of 
suspension  was  its  failure  to  meet  Clearing  House  balances. 

The  unsatisfactory  condition  of  this  bank  was  apparent  to 
the  Comptroller's  office  for  several  months  immediately  preceding 
its  suspension,  and  the  officers  of  the  bank  had  been  repeatedly 
admonished  by  the  Comptroller  to  make  good  and  maintain  the 
lawful  reserve  at  the  legal  requirement.  The  Clearing  House  was 
aware  of  the  bank's  inability  to  do  this  and  on  several  occasions 
complained  to  the  Comptroller  of  the  deficiency  in  reserve.  In 
October,  1890,  when  the  financial  stringency  came  on,  the  depos- 
itors in  this  institution  became  alarmed  at  the  embarrassment  of 
other  banks  and  began  withdrawing  their  deposits.  The  average 
monthly  withdrawals  for  several  months  before  suspension 
amounted  to  $100,000,  so  that  the  bank  was  unable  to  meet  its 
Clearing  House  balances. 

At  the  time  of  the  failure  of  this  institution,  F.  Y\\  Kennedy 
was  its  president,  and  H.  H.  Kennedy  the  cashier.  Subsequent 
investigation  disclosed  criminal  violations  of  law  on  the  part  of 
these  officers  and  two  of  the  directors  of  the  association,  no  less 


162  ROIMANCE  AND  TRAGEDY  OF  BANKING 

culpable  than  those  of  the  officers  of  the  Keystone  National  Bank. 
Botli  of  the  Kennedys  were  indicted  for  wilfully  misapplying  the 
funds  of  the  association  and  both  pleaded  guilty  and  were  sen- 
tenced to  terms  in  the  penitentiary.  Nelson  F.  Evans  and 
Ephraim  Young,  directors  of  the  bank,  were  also  indicted  for  the 
same  offense  and  entered  pleas  of  not  guilt}',  but  were  also  con- 
victed and  sentenced  to  the  penitentiary. 

The  capital  of  this  bank  was  $750,000.  Its  total  assets  and 
liabilities  at  the  time  of  failure  amounted  to  $2,936,662,  respec- 
tively'. The  loans  on  assets  compounded  or  sold  under  order  of 
the  court  amounted  to  $2,367,827.  One  hundred  per  cent,  assess- 
ment was  levied  upon  the  shareholders,  or  $750,000,  of  which 
amount  there  was  collected  $274,110,  and  the  total  amount  col- 
lected by  the  receiver  from  all  sources  aggregated  $712,711.  The 
creditors  were  paid  dividends  amounting  to  25.70  per  cent.,  or 
$537,687,  and  the  receivership  was  finally  closed  December  9, 
1901. 

The  difference  between  the  sum  collected  by  the  receiver  and 
the  amount  paid  the  creditors,  represents  loans  paid  and  expenses 
of  the  receivership. 

Failure  of  the  Maverick  National  Bank 

The  Maverick  National  Bank  of  Boston  was  originally  a  State 
institution.  At  the  time  of  its  conversion  into  a  national  associa- 
tion in  December,  1864,  its  capital  stock  was  $400,000,  and  its 
liabilities,  exclusive  of  capital,  $495,461.  The  last  report  of  con- 
dition of  the  National  Association  immediately  preceding  its  fail- 
ure showed  its  capital  to  be  $400,000,  surplus  $800,000,  and  its 
total  liabilities,  exclusive  of  capital,  $10,343,749. 

For  some  time  before  the  failure  of  the  institution  it  had  been 
in  an  unsatisfactory  condition  and  was  a  source  of  anxiety  to  the 
Comptroller's  office,  although  there  was  no  reason  to  believe  that 
it  was  insolvent.  This  unsatisfactory  condition  was  due  to  the 
largely  excessive  loans  made  to  certain  of  the  bank's  directors. 
The  real  character  and  extent  of  the  loans,  however,  were  not 
known  to  the  Comptroller  until  after  the  failure  of  the  bank,  when 
their  speculative  nature  was  revealed. 


ROMANCE  AND  TRAGEDY  OF  BANKING  163 

Asa  P.  Potter  was  president  of  the  institution  and  its  ruling 
spirit.  He  and  one  of  its  directors,  Jonas  H.  French,  owned 
more  than  half  of  the  capital  stock.  Potter's  holdings  amounted 
to  $147,000,  and  French's  to  $96,500.  They  appeared  to  operate 
the  bank  as  their  personal  institution,  without  regard  to  law  or 
the  restrictions  of  the  statutes,  and  freely  used  its  funds  in  reck- 
less speculations.  Numerous  loans  were  made  largely  in  excess 
of  the  legal  limit,  not  only  to  themselves,  but  to  others  with  whom 
they  were  connected  in  business  or  in  speculative  ventures.  To 
conceal  these  large  unlawful  loans,  deceptive  methods  wei'e  re- 
sorted to.  Dummy  notes  were  freely  used,  collaterals  were  depos- 
ited with  the  notes,  and  written  guarantees,  separate  from  the 
notes,  were  taken  from  the  real  debtors.  The  signers  of  these 
notes  were  relatives,  street  brokers,  clerks,  messengers,  janitors, 
white  and  colored,  and  minors  under  the  age  of  fourteen  yeai's. 

Among  the  concerns  that  were  excessive  borrowers  of  the  bank 
was  the  firm  of  Irving  A.  Evans  &  Company,  stock  brokers,  with 
which  Mr.  Potter  was  associated.  Irving  A.  Evans  failed  owing 
the  bank  $611,326,  and  shot  himself  at  Allentown,  N.  H.,  on  the 
16th  day  of  October,  1891.  Immediately  following  his  suicide. 
Potter  released  the  surviving  members  of  the  firm,  and  the  signers 
of  the  accommodation  notes  held  by  the  bank,  to  the  amount  of 
$591,326,  taking  collaterals  of  the  value  of  not  more  than 
$150,000  in  full  settlement.  The  greater  pai't  of  this  obligation 
was,  therefore,  thrown  upon  the  Maverick  National  Bank  in  the 
form  of  a  loan  on  a  note  signed  by  a  bookkeeper  in  the  bank  for 
$402,236,  with  the  Evans  collaterals  as  security. 

The  shock  of  the  Evans  failure  and  suicide  had  its  effect  upon 
the  bank  and  precipitated  its  closing  on  October  31,  1891,  on 
which  date  Alfred  Ewer,  who  was  the  assistant  of  the  National 
Bank  Examiner  for  Boston,  James  W.  Magruder,  took  posses- 
sion of  the  institution.  Mr.  Magruder,  whose  health  had  not  been 
good  for  some  time,  died  suddenly  on  the  day  following  the  closing 
of  the  bank. 

At  the  date  of  closing  Messrs.  Potter,  French  and  Dana  were 
indebted  to  the  institution  in  the  sum  of  $1,364,041.25,  $704,- 
182.93  and  $487,782.35  respectively,  or  a  total  of  $2,556,006.53. 


164  RO]MAi\CE  AND  TRAGEDY  OF  BANKING 

After  the  failure  of  the  institution  an  examination  of  the 
books  disclosed  that  the  reports  of  condition  made  to  the  Comp- 
troller had  been  deliberately  and  systematically  falsified  in  order 
to  conceal  from  him  and  the  public  the  true  condition  of  the 
institution. 

Although  the  gross  liabilities  of  the  directors  amounted  to  the 
sum  of  $2,556,006.53,  the  reports  of  the  bank  showed  the  aggre- 
gate of  such  liabilities  to  be  less  than  $200,000.  The  limit  of  a 
loan  that  this  bank  could  lawfully  make  was  $40,000,  and  as  the 
board  consisted  of  only  five  directors,  if  each  director  had  bor- 
rowed to  the  limit,  the  aggregate  of  such  loans  could  not  have 
exceeded  $200,000.  Consequently,  the  sum  total  of  their  loans 
was  shown  in  the  sworn  reports  of  condition  of  the  bank  to  be 
less  than  $200,000. 

An  assessment  of  one  hundred  per  cent,  was  levied  by  the 
Comptroller  upon  the  stockholders  of  the  association,  and  $139,- 
427  of  this  amount  was  collected.  The  total  collections  from  all 
sources  amounted  to  $7,059,027,  and  90.16  per  cent,,  or  $6,754,- 
775,  was  paid  in  dividends  to  the  depositors  and  other  creditors, 
T'he  receivership  was  finally  closed  March  31,  1898, 

Voluminous  indictments  were  found  against  Asa  P,  Potter,  the 
president  of  the  bank,  and  Jonas  H,  French  and  Thomas  Dana, 
directors,  for  wilful  misapplication  of  the  funds  of  the  associa- 
tion, embezzlement,  false  entries  in  the  books  and  false  reports  to 
the  Comptroller,  but  these  indictments  were  quashed  by  Judge 
Nelson  of  the  United  States  Court,  Some  time  later  other  indict- 
ments were  found  against  these  same  individuals,  which  were  sus- 
tained and  the  cases  were  assigned  for  trial.  For  some  reason  or 
other  the  Government  appears  to  have  abandoned  all  of  the  in- 
dictments, excepting  that  against  Asa  P.  Potter,  for  over-certifi- 
cations of  checks.  He  was  tried  on  this  indictment  and  found 
guilty,  A  sentence  of  thirty  days  in  jail  and  a  fine  of  five  thou- 
sand dollars  was  imposed  by  Judge  Putnam,  Exceptions  were 
filed  by  his  counsel  and  after  a  delay  of  a  year  or  more  were  heard 
by  the  Circuit  Court  of  Appeals,  which  sustained  some  of  the  ex- 
ceptions and  ordered  a  new  trial.  The  sentence  from  which  appeal 
was  made,  however,  was  so  light,  and  the  expenses  of  a  new  trial 
so  heavy,  that  the  Government  did  not  feel  warranted  in  prose- 


ROMANCE  AND  TRAGEDY  OP  BANKING  165 

cuting  the  case  to  a  finish.     Jonas  H.  French  and  Thomas  Dana 
died  some  time  afterward,  and  Potter  left  Boston. 


Laws  Relative  to  National  Banks 

On  June  2,  1892,  a  committee  was  appointed  by  the  United 
States  Senate,  under  authority  of  a  resolution  adopted  by  that 
body,  to  inquire  whether  the  laws  relative  to  national  banks  and 
the  customary  proceedings  under  such  laws  in  connection  with 
failures  of  national  banking  associations,  furnished  sufficient  pro- 
tection to  the  depositors  and  stockholders  in  such  institutions. 
Senator  William  E.  Chandler  was  made  chairman  of  the 
committee. 

This  committee  made  an  exhaustive  investigation  into  the 
causes  which  led  to  the  failure  of  the  Maverick  National  Bank 
and  the  manner  in  which  the  law  was  administered  by  the  Comp- 
troller of  the  Currency,  The  investigation  also  covered  the  fail- 
ures of  the  Ke3'stone  and  Spring  Garden  National  Banks  of 
Philadelphia. 

The  conclusion  reached  by  the  committee,  as  shown  by  the 
report,  was  that  the  results  of  the  operations  of  the  national 
banking  laws  during  a  period,  at  that  time,  of  nearly  thirty  years, 
indicated  to  the  minds  of  the  committee  that  the  system  as  a  whole 
had  worked  very  satisfactorily  and  had  resulted  in  as  few  failures 
and  losses  as  could  reasonably  be  expected  under  any  banking 
system  that  could  be  devised. 

There  had  been  many  failures,  however,  the  committee  stated, 
that  could  probably  have  been  avoided  if  the  system  had  been  as 
perfect  as  it  could  have  been  made. 

What  the  committee  intended  to  imply  by  this  comment  is  not 
clear.  But  there  was  a  disposition  on  the  part  of  the  committee 
to  reflect  upon  the  course  of  the  bank  examiners  who  examined 
these  banks  previous  to  their  failure.  And  there  was  considerable 
justification  for  this,  as  the  testimony  showed  undue  intimacy  and 
improper  relations  between  the  examiner  and  the  officers  of  the 
bank  in  one  case,  and  great  laxity  or  culpability  in  the  others. 

It  might  also  be  implied  by  the  comment  of  the  committee  that 
Congress  itself  was  derelict  in  the  performance  of  its  duty,  in  not 


166  ROMANCE  AND  TRAGEDY  OF  BANKING 

having  given  due  consideration  to  the  recommendations  of  the 
Comptroller  of  the  Currency,  from  time  to  time,  for  such  amend- 
ments to  the  banking  laws  as  would  in  the  judgment  and  experi- 
ence of  the  Comptrollers,  have  strengthened  some  of  the  weak 
features  in  the  statutes  which  were  largely  responsible  for  the 
conditions  known  to  have  existed  in  these  banks  before  their 
failure. 

Evidently  the  committee  was  of  the  opinion  that  additional 
legislation  was  necessary  to  reach  abuses  of  the  nature  of  those 
disclosed  by  the  investigation  of  the  causes  which  led  to  the  failure 
of  these  banks,  as  a  bill  to  amend  the  laws  relating  to  national 
banks  was  introduced  in  the  Senate  by  Senator  Chandler  on  Feb- 
ruary 11,  1893,  and  referred  to  the  Select  Committee  on  Failed 
National  Banks,  which  committee  reported  it  favorably  five  days 
later. 

This  bill  provided  for  an  increase  in  the  limit  of  loans  of  the 
banks  from  ten  per  cent,  of  the  capital  stock  to  an  amount  equal 
to  ten  per  cent,  of  the  capital  and  surplus,  the  latter  to  be  deter- 
mined by  the  report  of  the  examiner  at  the  time  of  the  last  previ- 
ous examination  of  the  association.  In  case  of  any  violation  of 
this  statute  it  was  made  mandatory  on  the  part  of  the  Comp- 
troller to  bring  a  suit  to  forfeit  the  charter  of  the  offending 
association,  and  the  Comptroller  was  prohibited  from  discontinu- 
ing such  suit  without  authority  of  the  Secretary  of  the  Treasury. 

While  the  law  at  that  time  contained  a  provision  authorizing 
such  a  proceeding,  its  enforcement  always  had  been  held  to  be  dis- 
cretionary with  the  Comptroller,  and  the  failure  on  his  part  to 
institute  a  suit  of  this  character  against  banks  which  had  been 
known  to  persistently  disregard  the  limitations  of  law  in  making 
loans,  has  subjected  him  to  severe  criticism  in  the  past  by  Con- 
gress and  the  press  of  the  country  when  banks  have  failed  through 
losses  sustained  upon  loans  which  largely  exceeded  the  prescribed 
limit. 

This  bill  provided  further  that  no  loan  should  be  made  to  any 
officer,  director,  employee  or  stockholder  of  the  bank  in  excess  of 
one  thousand  dollars,  except  upon  the  authority,  previously 
granted  in  writing,  and  signed  by  the  president  or  vice-president 
of  the  bank  and  three-fourths  of  the  directors,  or  by  a  majority 


ROMANCE  AND  TRAGEDY  OF  BANKING  167 

vote  of  the  directors  at  a  meeting  of  the  board  duly  recorded  on 
the  minutes  of  such  board  meetings.  The  directors  were  also 
required  to  keep  a  liability  register,  in  which  all  loans  should  be 
recorded,  and  any  false  entry  in  such  liability  record,  or  any  in- 
tentional omission  therefrom,  should  subject  the  guilty  party  to 
a  fine  of  not  exceeding  five  thousand  dollars,  or  to  imprisonment 
for  a  term  of  not  exceeding  one  year,  or  both,  in  the  discretion 
of  the  court. 

This  bill  also  empowered  the  Comptroller  to  summon  to  Wash- 
ington any  officer  or  director  of  a  bank  who  persisted  in  violat- 
ing the  law  after  due  admonition,  to  show  cause  why  he  should 
not  be  removed  from  office,  and  authorized  the  Comptroller,  with 
the  approval  of  the  Secretary  of  the  Treasury,  after  a  hearing, 
to  remove  from  office  such  offending  officer  or  director. 

In  order  to  facilitate  the  collection  of  assessments  from  share- 
holders to  make  good  an  impairment  of  the  capital  stock  of  a 
bank,  the  Comptroller  was  authorized  to  file  with  the  Recorder  or 
Register  of  Deeds  in  the  county  or  district  in  which  the  stock- 
holder resided,  or  in  which  he  owned  real  estate,  a  certificate  recit- 
ing the  name  of  the  stockholder,  the  number  of  shares  owned  by 
him  and  the  amount  of  the  assessment  thereon,  which  certificate 
should  constitute  a  lien  upon  any  real  estate  owned  by  such  share- 
holder for  the  amount  of  the  assessment. 

There  were  other  provisions  in  this  bill,  but  the  foregoing 
covers  its  most  important  features.  Like  all  previous  attempts 
to  impose  additional  restrictions  by  legislative  enactment  upon 
the  banks,  or  to  confer  increased  supervisory  powers  upon  the 
Comptroller,  so  as  to  enable  him  to  more  effectively  enforce  an 
observance  of  the  statutes,  this  bill  failed  to  become  a  law  and 
the  exhaustive  inquiry  made  by  the  committee  came  to  naught. 

The  National  Bank  Act  requires  the  Comptroller  of  the  Cur- 
rency to  report  annually  direct  to  Congress,  and  to  recommend 
among  other  things : 

Any  amendments  of  the  law  relating  to  banking  by 
which  the  system  may  be  improved  and  the  security  of  the 
holders  of  its  notes  and  other  securities  may  be  increased. 


168  ROIilANCE  AND  TRAGEDY  OF  BANKING 

No  noteholder  of  a  national  bank  ever  has  lost  a  dollar 
through  the  failure  of  the  association  issuing  the  notes  to  redeem 
its  circulation  at  its  face  value.  The  circulation  of  national 
banks  being  absolutely  secured  by  a  deposit  of  interest-bearing 
bonds  of  the  United  States  with  the  Treasury  Department,  Comp- 
trollers of  the  Currency  did  not  deem  it  necessary  to  make  any 
recommendations  to  Congress  for  the  better  security  of  note- 
holders of  national  banks. 

But  what  of  the  depositors  and  other  creditors,  the  safety  of 
whose  funds  depend  wholly  upon  the  good  judgment  and  honesty 
of  the  management  of  a  bank  and  the  sufficiency  of  the  security 
held  for  its  loans.  What  has  been  done  since  the  passage  of  the 
original  Bank  Act  to  increase  the  security  of  deposits,  either  by 
way  of  legislation  enacted  or  recommendations  submitted? 

While  numerous  recommendations  for  amendments  to  the  law 
were  submitted  to  Congress  from  time  to  time  by  the  various 
Comptrollers,  which  in  the  judgment  of  each  would  have  improved 
the  system  and  added  to  the  security  of  depositors,  very  few  of 
these  suggested  amendments  were  enacted  into  law  or  received 
the  serious  consideration  of  Congress. 

Of  the  numerous  amendments  of  the  original  Bank  Act 
adopted  since  1864,  not  one  of  such  amendments  can  be  said  to 
have  had  for  its  object  the  increase  of  the  security  of  depositors 
in  national  banks.  Whatever  additional  safeguards  were  adopted 
in  the  interest  of  the  depositor  were  in  the  nature  of  administra- 
tive regulations,  which  in  the  absence  of  statutory  authority  were 
not  always  capable  of  enforcement,  especially  in  cases  where  en- 
forcement was  most  needed. 

The  continued  indifference  of  Congress  before  the  passage  of 
the  Federal  Reserve  Act  to  the  recommendations  of  the  Comp- 
troller of  the  Currency  for  such  amendments  to  the  national  bank- 
ing laws  led  Mr.  Lacey  to  conclude  his  annual  report  for  the  year 
1890  with  the  following  pointed  comments : 

The  Comptroller  desires  to  emphasize  the  fact  that  the 
national  banking  system  has  arrived  at  a  point  in  its 
history  when  continued  neglect  on  the  part  of  Congress 
is    as    potent   for    evil    as    unfriendly    action.      Certain    bur- 


ROMANCE  AND  TRAGEDY  OF  BANKING  169 

dens  resting  upon  it  must  be  removed  without  unnecessary 
delay,  if  immediate  stagnation  and  ultimate  decay  are  to 
be  prevented.  It  should  receive  such  wise  and  just  treat- 
ment as  will  result  in  a  healthful  growth,  or  else  provision 
should  immediately  be  made  for  the  inauguration  of  some 
new  system,  more  completely  adapted,  if  possible,  to  the 
wants  of  the  people.  Banks  are  indispensible  to  the  suc- 
cessful conduct  of  the  various  business  enterprises  which 
form  a  prominent  feature  in  modern  civilization.  These 
agencies  must  keep  pace  with  the  progress  made  in  manu- 
factures, in  commerce,  and  in  all  forms  of  industrial  ac- 
tivities, or  serious  embarrassements  will  surely  follow.  The 
national  system  must  occupy  the  field  or  give  way  to  an- 
other. 

What  Mr.  Lacey  said  with  so  much  truth  and  force  had  no 
apparent  effect  on  the  legislative  branch  of  the  Government.  No 
material  amendment  was  made  to  the  laws  until  the  adoption  of 
the  Federal  Reserve  Act  in  December,  1913. 

The  inability  of  national  banks  in  the  meantime  to  handle 
certain  lines  of  business  within  their  corporate  powers  and  the 
limitations  of  law  led  to  the  formation  of  trust  company  adjuncts 
in  many  of  the  cities  and  towns  to  enable  the  banks  to  hold  a  class 
of  business  that  they  could  not  transact  as  national  associations, 
until  it  was  not  uncommon  to  see  a  national  bank,  a  savings  bank, 
and  a  trust  company,  operated  and  controlled  by  the  same  stock- 
holders and  the  same  management,  and  frequently  in  the  same 
building.  This  condition  became  a  necessity,  for,  as  Mr.  Lacey 
said,  "The  national  system  must  occupy  the  field  or  give  place  to 
another." 

Under  State  laws  commercial  banks  were  found  doing  a  com- 
mercial and  savings  bank  business,  savings  banks  doing  a  com- 
mercial business,  and  trust  companies  doing  all  three  classes  of 
business,  while  national  banks  were  restricted  in  their  operations 
to  purely  a  commercial  business. 

A  commercial  bank  with  a  separate  and  distinct  savings  and 
trust  department,  under  proper  restrictions,  can  be  as  safely  op- 
erated by  one  corporation  and  management  as  the  three  classes 
of  business  can  be  conducted  by  separate  corporations  operating 


/ 


170  ROAIANCE  AND  TRAGEDY  OF  BANKING 

under  independent  charters  but  owned,  officered  and  controlled 
by  the  same  management  and  stockholders,  and  certainly  much 
more  economically,  and  therefore  more  profitably. 

Necessity  for  Some  Limitation  Upon  the  Discount  of  Commercial 

Paper 

The  conditions  disclosed  by  the  bank  failures  above  mentioned 
and  others  that  occurred  during  the  year  1891,  led  Mr.  Lacey  to 
express  the  opinion  in  his  report  for  that  year  that  some  limita- 
tion should  be  placed  upon  the  amount  of  commercial  or  business 
paper  that  may  be  discounted  by  a  national  bank  for  any  one 
person,  company,  corporation  or  firm,  and  that  a  similar  restric- 
tion should  be  placed  upon  indirect  liabilities  of  guarantors  or 
endorsers.  If,  he  stated,  it  was  deemed  necessary  to  limit  direct 
loans  to  a  percentage  of  the  capital  of  a  bank,  for  the  same  reason 
indirect  liabilities  should  be  subject  to  some  restriction. 

Further  comments  will  be  made  upon  this  subject  in  connec- 
tion with  the  recommendations  submitted  to  the  National  Mone- 
tary Commission  in  December,  1908,  for  amendments  to  the 
national  banking  laws. 

Suggested  Amendments  to  the  Law 

Most  of  the  recommendations  for  amendments  to  the  banking 
laws  urged  by  Mr.  Lacey  upon  Congress  were  in  relation  to  the 
note-issuing  function  of  the  banks.  Some  of  these  proposed 
amendments  have  been  since  enacted  into  law.  One  recommenda- 
tion, however,  which  seemed  to  have  considerable  merit,  did  not 
receive  favorable  action  by  Congress  until  the  passage  of  the 
Federal  Reserve  Act  in  1913,  although  Senator  John  Sherman, 
on  July  15,  1890,  reported  a  bill  favorably  from  the  Finance 
Committee  designed  to  carry  it  into  effect.  This  proposition  was 
to  reduce  the  minimum  amount  of  bonds  which  the  banks  were 
required  to  deposit  as  security  for  circulation  and  as  a  condition 
precedent  to  obtaining  a  charter,  to  one  thousand  dollars,  re- 
gardless of  the  amount  of  the  bank's  capital,  instead  of  a  deposit 
of  bonds  equal  to  one-fourth  of  the  capital  stock  by  banks  with 


ROMANCE  AND  TRAGEDY  OF  BANKING  171 

a  capital  of  less  than  $150,000,  and  a  deposit  of  fifty  thousand 
dollars  by  banks  with  a  capital  in  excess  of  $150,000,  as  required 
by  then  existing  law. 

This  legislation  was  recommended  by  Mr.  Lacey  in  order  to 
relieve  the  banks  from  the  enforced  necessity  of  issuing  unre- 
munerative  circulation  when  there  was  no  need  or  demand  for  an 
increase. 

The  Federal  Reserve  Act  dispensed  with  the  requirement  for 
the  deposit  of  any  charter  bonds. 

In  his  report  for  1889,  Mr.  Lacey  called  attention  to  a  per- 
plexing question  which  was  frequently  raised  while  he  was  Comp- 
troller, in  connection  with  the  existence  of  banks  with  a  small 
capital  in  places  contiguous  to  large  cities.  Where  the  growth 
of  large  cities  brought  these  smaller  banks  within  the  corporate 
limits  the  anomaly  was  frequently  presented  of  a  bank  with  a 
capital  stock  of  fifty  thousand  dollars  or  less  doing  business  in 
a  city  the  population  of  which  would  not  permit  of  the  organiza- 
tion of  a  bank  with  a  capital  of  less  than  two  hundred  thousand 
dollars,  the  smaller  banks  carrying  a  reserve  of  fifteen  per  cent, 
and  the  larger  ones  twenty-five  per  cent.  Two  banks  of  exactly 
the  same  title  were  also  in  some  instances  brought  together  in  the 
same  city,  causing  confusion  and  friction. 

In  order  to  make  clear  the  rights  and  duties  of  banks  thus 
located,  Mr.  Lacey  suggested  legislation  on  the  subject,  although 
he  did  not  indicate  its  character,  but  nothing  was  done.  This 
question  of  organizing  small  banks  in  the  suburbs  of  large  cities 
continued  to  perplex  the  Comptroller's  office  until  June  6,  1913, 
when  the  Attorney  General  of  the  United  States  rendered  an 
opinion  taking  the  position  that  no  national  bank  could  legally 
be  chartered  in  any  place  within  the  corporate  limits  of  any  city, 
with  an  authorized  capital  of  less  than  the  minimum  amount 
required  by  law  for  a  bank  in  the  city  proper.  Since  this  decision 
no  national  banks  have  been  authorized  with  a  small  capital  in 
suburbs  within  the  corporate  limits  of  large  cities. 

Considerable  friction  having  arisen  between  officers  of  national 
banks  and  State  taxing  officers  as  to  what  constitutes  "moneyed 
capital"  within  the  meaning  of  the  Bank  Act  subject  to  taxation 
under  State  authority,  to  meet  this  difficulty  Mr.  Lacey  suggested 


172  KO:kIANCE  AND  TRAGEDY  OF  BANKING 

an  amendment  to  the  law  defining  in  clear  and  unmistakable  terms 
the  intent  of  the  language  employed  in  the  statute  "other  mon- 
eyed capital  in  the  hands  of  individual  citizens,"  as,  he  stated,  it 
was  difficult  in  some  cases,  in  view  of  the  fine  distinction,  to  deter- 
mine when  moneyed  capital  may  be  said  to  have  been  merged  into 
personal  property  or  exempted  by  the  statutes  of  some  States 
from  taxation. 

Mr.  Lacey  also  pointed  out  a  number  of  other  ambiguous 
terms  and  phrases  in  the  statutes,  difficult  of  interpretation,  and 
suggested  legislation  to  make  their  meaning  clear  and  definite. 

In  connection  with  the  liabilities  of  the  active  officers  of  the 
banks  Mr.  Lacey  recommended  that  they  be  excluded  from  incur- 
ring liabilities  to  the  association  with  which  they  are  connected 
for  any  amount,  and  that  the  directors  of  the  bank  be  limited  in 
their  direct  ".nd  indirect  liabilities  to  an  amount  not  exceeding 
twenty  per  cent,  of  the  paid-in  capital  of  the  association.  He 
was  of  the  opinion  that  the  publication  of  the  liabilities  of  officers 
and  directors  in  the  aggregate  would  afford  a  valuable  safeguard 
against  the  excessive  use  of  the  funds  of  the  association  by  those 
who  were  entrusted  with  them. 

There  was  onl}'  one  amendment  to  the  banking  laws  passed 
during  Mr.  Lacey's  term  of  office,  and  that  was  the  Act  of 
July  14,  1890,  requiring  all  deposits  of  lawful  money  made  by 
the  banks  with  the  Treasurer  of  the  United  States  for  the  re- 
demption and  retirement  of  their  circulation  to  be  covered  into 
the  Treasury  as  a  miscellaneous  receipt,  instead  of  being  segre- 
gated as  was  required  before  the  passage  of  this  Act.  This  pro- 
vision of  law,  however,  does  not  apply  to  deposits  received  by  the 
Treasurer  for  the  five  per  cent,  redemption  fund. 


A.  BARTON  HEPBURN 
Comptroller  of  the  Currency,  1892-1893 


CHAPTER  X 

A.  Barton  Hepburn 

THE  eighth  Comptroller  of  the  Currency,  A.  Barton  Hep- 
burn, was  appointed  to  succeed  Mr.  Lacey,  August  2, 
1892.  He  was  born  at  Colton,  N.  Y.,  July  24,  1846. 
He  received  his  preparatory  education  at  St.  Lawrence  Acad- 
emy, Potsdam,  N.  Y.,  and  the  Falley  Seminary,  Fulton, 
N.  Y.  In  1867  he  entered  Middlebury  College,  Middlebury,  Vt., 
from  which  institution  he  received  the  degrees  of  A.B.  and  LL.D. 
After  leaving  college  he  was  engaged  as  Professor  of  Mathematics 
in  the  St.  Lawrence  Academy  and  Principal  of  the  Ogdensburg 
Educational  Institute.  He  was  later  admitted  to  the  bar  and 
commenced  the  practice  of  law  at  Colton,  N.  Y.  Shortly  after- 
ward he  was  appointed  School  Commissioner  of  the  Second  Dis- 
trict of  St.  Lawrence  County,  which  position  he  held  for  over 
three  years.  He  was  elected  to  the  New  York  State  Assembly 
and  took  his  seat  January  1,  1875.  He  represented  his  district 
in  the  Legislature  for  five  consecutive  terms,  during  which  period 
he  was  a  member  of  the  Committees  on  Railroads,  Insurance, 
Judiciary,  and  Ways  and  Means,  and  devoted  his  attention  to 
commercial  and  financial  interests,  insurance,  railroads  and 
canals. 

As  chairman  of  the  Committee  on  Insurance  he  was  instru- 
mental in  introducing  and  securing  the  passage  of  a  bill  making 
life  insurance  policies  non-forfeitable  after  the  payment  of  three 
annual  premiums,  and  requiring  the  insurance  companies,  upon 
application,  to  issue  paid-up  insurance  to  an  amount  which  the 
surrender  value  of  the  policy  Avould  purchase  at  regular  rates. 

In  1879  he  was  chairman  of  the  Special  Railroad  Investiga- 
tion Committee,  known  as  the  "Hepburn  Committee,"  created  at 
the  instance  of  the  Chamber  of  Commerce  of  New  York  City,  the 
Board  of  Trade  and  Transportation,  and  other  commercial 
bodies  of  the  State.     He  reported  a  number  of  important  meas- 

17S 


174  ROMANCE  AND  TRAGEDY  OF  BANKING 

ures  to  the  Legislature,  which  became  laws,  among  which  were 
the  Act  creating  the  Railroad  Commission;  an  Act  to  regulate 
the  use  of  proxies,  and  an  Act  defining  and  regulating  annual 
reports  and  requiring  a  continuous  balance  sheet. 

In  April,  1880,  he  was  appointed  by  Governor  Cornell,  Super- 
intendent of  the  Banking  Department  of  the  State  of  New  York, 
which  position  he  retained  over  three  years,  until  succeeded  by 
Willis  S.  Paine,  under  Governor  Grover  Cleveland's  administra- 
tion. Mr.  Hepburn's  administration  of  the  Banking  Department 
of  New  York  was  very  successful  and  satisfactory,  and  was  gen- 
erally commended  by  the  banks  and  the  public.  In  recognition 
of  his  exceptional  ability  as  Superintendent,  in  1883,  he  was 
appointed  receiver  of  the  Continental  Life  Insurance  Company  of 
New  York  City,  and  liquidated  the  affairs  of  that  company. 

In  June,  1889,  he  was  appointed,  by  Mr.  Lacey,  National 
Bank  Examiner  for  New  York  City  and  Brooklyn,  to  succeed 
Valentine  P.  Snyder,  former  Deputy  Comptroller  of  the  Currency 
under  President  Cleveland.  He  demonstrated  his  ability  as  a 
financier  and  a  man  of  discretion  and  judgment  in  this  position, 
and  his  prompt  and  decisive  action  in  connection  with  the  Sixth 
and  Lenox  Hill  bank  frauds  secured  the  conviction  of  the  princi- 
pal wrongdoers  in  those  banks  and  a  restitution  of  the  funds  mis- 
appropriated. He  retained  the  position  of  examiner  until  ap- 
pointed Comptroller  of  the  Currency,  July  27,  1892,  by  President 
Harrison,  to  succeed  Mr.  Lacey. 

The  position  of  National  Bank  Examiner  for  New  York  City 
was  the  most  important  and  remunerative  office  within  the  patron- 
age of  the  Comptroller  of  the  Currency,  and  the  examiner 
assigned  to  that  city  is  supposed  to  be,  and  should  be,  one  of  the 
most  efficient  in  the  service.  Under  the  fee  system  of  compen- 
sating examiners,  the  fees  paid  for  examinations  in  New  York, 
like  those  in  other  Central  Reserve  Cities,  were  based  on  the  cap- 
ital of  the  banks  examined,  with  an  additional  allowance  of  two 
cents  on  each  one  thousand  dollars  of  the  average  gross  liabilities 
as  shown  by  the  five  reports  of  condition  of  the  banks  for  the  pre- 
ceding year.  The  fee  based  upon  capital  varied  with  the  size  of 
the  banks.  For  a  bank  with  a  capital  stock  of  not  exceeding 
$300,000,  the  fee  was  fifty  dollars.     With    a    capital    of    over 


ROMANCE  AND  TRAGEDY  OF  BANKING  175 

$300,000  and  not  exceeding  $500,000,  it  was  sixty  dollars.  For 
a  capital  of  over  $500,000  and  not  exceeding  $750,000,  it  was 
eighty  dollars.  For  a  capital  of  over  $750,000  and  under  a  mil- 
lion dollars,  one  hundred  dollars.  For  a  capital  of  $1,000,000, 
one  hundred  and  twenty  dollars,  and  an  additional  allowance  was 
made  of  one  dollar  for  every  hundred  thousand  dollars  of  capital 
in  excess  of  one  million. 

The  gross  fees  for  one  examination  of  all  the  national  banks 
in  New  York  City,  Brooklyn  and  Jersey  City,  which  latter  city 
was  in  the  New  York  City  district,  amounted  to  about  $17,000, 
and  in  later  years  to  considerably  more.  While  this  may  seem 
very  large,  measured  by  the  average  Government  compensation, 
when  the  examiner's  expenses  were  deducted  the  net  fees  were 
considerably  less  than  those  received  by  public  accountants  and 
others  engaged  in  the  same  line  of  work. 

The  examiners  in  New  York  City  employed  several  assistants, 
some  of  whom  were  high  salaried  men.  They  had  to  maintain  an 
office  with  all  the  paraphernalia  pertaining  thereto,  all  of  which 
had  to  be  paid  for  out  of  their  gross  earnings.  The  duties  of  the 
position  were  very  onerous,  but  the  experience  was  invaluable. 

With  his  experience  as  a  legislator,  as  Superintendent  of  the 
Banking  Department  of  New  York  State,  and  as  a  National  Bank 
Examiner  for  New  York  City,  Mr.  Hepburn  came  to  the  office  of 
Comptroller  of  the  Currency  thoroughly  and  unusually  well 
equipped  for  an  intelligent  discharge  of  the  responsible  duties  of 
the  position.  Unfortunately,  however,  he  did  not  have  an  oppor- 
tunity to  demonstrate  his  special  qualifications  as  a  financier, 
owing  to  the  brief  period  of  his  incumbency  incident  to  a  change 
in  the  political  complexion  of  the  Federal  administration.  His 
term  of  office  was  the  shortest  of  any  Comptroller  who  had  occu- 
pied the  position,  covering  a  period  of  only  nine  months  and 
twenty-three  days.  Notwithstanding  this  fact  his  administration 
was  marked  by  the  same  characteristic  ability  and  forcefulness 
that  was  shown  in  every  public  position  he  had  held.  His  entire 
career  in  public  life  indicates  that  he  was  a  man  of  exceptional 
attainments  and  executive  force,  and  a  worthy  successor  of  the 
able  men  who  preceded  him  in  the  office  of  Comptroller,  a  success- 


176  ROMANCE  AND  TRAGEDY  OF  BANKING 

ful  administration  of  which  calls  for  qualifications  of  the  highest 
type  and  character,  broadmindedness  and  conservatism. 

Upon  his  retirement  as  Comptroller,  Mr.  Hepburn  was  ap- 
pointed president  of  the  Third  National  Bank  of  New  York  City 
and  continued  at  the  head  of  that  institution  until  it  was  merged 
with  the  National  City  Bank  of  New  York  in  1897.  He  was 
appointed  vice-president  of  the  consolidated  institution,  but 
shortly  afterward  resigned  to  accept  the  presidency  of  the  Chase 
National  Bank  of  New  York,  which  position  he  continued  to  hold 
until  January,  1911,  when  he  resigned  but  continued  to  be  con- 
nected with  the  bank  as  chairman  of  the  board  of  directors,  and 
later  as  chairman  of  the  Advisory  Committee. 

Mr.  Hepburn  was  recognized  throughout  the  United  States 
and  the  money  centers  of  the  world  as  a  leading  authority  on 
financial  and  economic  questions.  He  is  the  author  of  "The  His- 
tory of  Coinage  and  Currency,"  a  work  which  required  much 
labor  in  its  compilation,  "Contest  for  Sound  Money",  and  also  of 
*'Artificial  Waterways  and  Commercial  Development".  He  was 
also  a  frequent  contributor  to  financial  magazines  and  periodicals 
on  various  economic  subjects  comprehending  a  wide  range  of 
literary  research. 

Nothing  of  any  special  moment  in  connection  with  banking 
and  currency  occurred  during  Mr.  Hepburn's  short  term  of  office, 
as  his  administration  covered  the  brief  period  only  between  the 
temporary  subsidence  of  the  monetary  stringency  of  1890  and 
the  memorable  panic  of  1893,  so  that  no  opportunity  was  afforded 
him  to  display  the  executive  force  that  he  possessed  or  to  put  into 
execution  any  administrative  reforms  in  connection  with  his 
supervision  of  the  banks.  If  he  had  had  the  opportunity  there  is 
no  doubt  that  he  would  have  inaugurated  some  practical  reforms 
in  the  management  of  the  banks  and  raised  the  standard  of  the 
examining  force  to  a  higher  level  than  that  which  prevailed  at 
that  time. 

Mr.  Hepburn  died  in  New  York  City  on  January  25,  1922, 
as  the  result  of  injuries  received  in  an  accident  several  days  before 
that  date.  He  was  crossing  Fifth  Avenue  and  was  struck  by  a 
passenger  motor  bus  sustaining  a  compound  fracture  of  the  hip. 


ROMANCE  AND  TRAGEDY  OF  BANKING  177 

National  Bank  Failures  During  Mr.  Hepburn's  Term 

Seventeen  national  banks  were  placed  in  the  hands  of  receivers 
during  the  year  covered  by  Mr.  Hepburn's  first  and  only  report 
to  Congress,  but  only  seven  of  these  failures  occurred  during  the 
nine  months  of  his  administration.  The  remainder  occurred  dur- 
ing the  closing  months  of  his  predecessor's  term. 

The  largest  of  these  failures  was  the  California  National 
Bank  of  San  Diego,  with  a  capital  of  $500,000  and  liabilities  of 
nearly  a  million.  This  failure  was  regarded  as  a  great  calamity 
to  the  local  community  and  considerable  effort  was  made  to  effect 
a  resumption  of  the  bank.  When  it  was  found,  however,  upon 
investigation,  that  the  entire  capital  and  surplus  of  the  associa- 
tion had  been  absorbed  by  losses,  the  efforts  to  resuscitate  the 
bank  proved  futile,  and  the  former  president  of  the  association 
committed  suicide. 

The  failure  of  this  bank  was  due  to  the  excessive  use  of  its 
funds  in  the  promotion  of  local  enterprises  of  a  public  character 
involving  large  sums  of  money.  The  local  boom  collapsed  before 
any  of  the  enterprises  became  paying  investments,  with  the  usual 
result  that  the  bank  suffered  losses  and  suspension  followed. 

Criminal  violations  of  law  entered  largely  into  all  of  these 
failures,  and  two  suicides  were  the  result.  False  entries,  misappro- 
priation of  funds,  embezzlements,  reckless  management,  forgery, 
loans  to  irresponsible  relatives  of  the  management,  their  friends 
and  employees  of  the  banks,  promotion  of  speculative  enterprises, 
in  which  some  of  the  officers  were  interested,  and,  in  fact,  the 
whole  category  of  causes  which  invariably  end  in  failures  and  dis- 
aster, were  responsible  in  bringing  about  the  disruption  of  all  of 
these  associations. 

Failure  of  the  National  Bank  of  Guthrie,  Oklahoma 

Included  in  these  failures  was  that  of  the  National  Bank  of 
Guthrie,  Oklahoma,  which  closed  its  doors  on  June  13,  1892.  It 
appears  that  the  capital  of  this  bank  having  become  impaired, 
the  Comptroller  ordered  the  deficiency  to  be  made  good  by  an 
assessment  of  the  stock,  or  the  placing  of  the  bank  in  voluntary 


178  ROMANCE  AND  TRAGEDY  OF  BANKING 

liquidation,  as  provided  by  law.  A  meeting  of  the  stockholders 
was  called  and  held,  and  a  majority  voted  to  pay  the  assessment. 
While  under  the  law  it  requires  a  vote  of  two-thirds  of  the  stock 
to  place  a  bank  in  voluntary  liquidation,  an  assessment  to  make 
good  an  impairment  of  capital  may  be  levied  by  a  majority  of 
the  stock  represented  at  the  meeting.  The  president  of  the  bank 
owned  nearly  six  hundred  shares  of  the  capital  stock,  half  of 
which  was  hypothecated  with  the  United  States  National  Bank 
of  New  York  City,  and  one  hundred  shares  each  with  two  national 
banks  in  Kansas  City,  Mo.  One  of  these  banks  had  loaned  an 
amount  equal  to  the  par  of  this  stock,  and  the  other  two  fifty 
per  cent,  of  the  par  value.  A  large  minority  of  the  stockholders, 
including  the  United  States  National  Bank,  being  dissatisfied 
with  the  management  of  the  institution  and  with  the  course  taken 
at  the  stockholders'  meeting,  brought  an  action  in  the  District 
Court  of  Logan  County,  Oklahoma,  for  the  appointment  of  a 
receiver  to  take  charge  of  the  assets  of  the  bank,  and  upon  this 
petition  a  receiver  was  appointed  by  the  Territorial  Court  in 
June,  1892. 

This  petition  alleged,  among  other  things,  that  the  president 
and  cashier  of  the  bank  had  stolen  and  misappropriated  large 
sums  of  money  of  the  association  and  were  trying  to  collect  an 
assessment  from  the  stockholders  so  that  they  could  personally 
use  fifteen  per  cent,  of  the  amount  collected.  It  was  alleged 
further  that  nearly  one  hundred  shares  of  the  stock  claimed  to 
be  owned  by  the  president  never  had  been  paid  for,  and  that  at 
the  stockholders'  meeting  the  president  voted  shares  unlawfull}', 
thus  controlling  the  action  of  the  meeting  and  voting  down  a 
motion  to  place  the  bank  in  voluntary  liquidation,  whereupon  the 
Territorial  Court  appointed  as  receiver  a  man  who  had  been  the 
personal  attorney  of  the  president  of  the  bank. 

When  the  Comptroller  learned  of  the  movement  to  have  the 
bank  placed  in  the  hands  of  a  receiver  appointed  by  the  court, 
he  immediately  appointed  the  national  bank  examiner  for  that 
section  receiver  and  directed  him  to  take  charge  of  the  bank. 
When  the  examiner  arrived  at  the  bank  he  found  the  receiver 
appointed  by  the  court  in  possession.  He  demanded  in  the  name 
of  the  Comptroller  of  the  Currency  that  the  assets  and  records 


ROMANCE  AND  TRAGEDY  OF  BANKING  179 

of  the  bank  be  turned  over  to  him,  but  his  demand  was  refused 
on  the  ground  that  the  depositors  and  other  creditors  of  the  asso- 
ciation had  been  paid  in  full,  and  that,  therefore,  the  stockholders 
alone  were  interested  in  the  remaining  assets  and  the  court  had 
jurisdiction.  The  national  bank  examiner,  however,  insisted  upon 
his  right  to  take  possession  of  the  bank  and  prepared  to  enforce 
that  right  through  the  courts,  when  the  Court  receiver  locked  up 
the  books  and  papers  of  the  bank  in  the  vaults  and  left  for  the 
East. 

The  receiver  appointed  by  the  Comptroller  never  obtained 
possession  of  the  bank,  but  the  Comptroller  never  recognized  the 
jurisdiction  of  the  Territorial  Court  to  appoint  a  receiver  and 
declined  to  surrender  to  him  the  bonds  of  the  bank  on  deposit 
with  the  Treasurer  of  the  United  States  as  security  for  circula- 
tion. These  bonds  were  withdrawn  from  the  Treasury  by  the 
Comptroller  and  sold  to  the  highest  bidder,  as  provided  by  law, 
the  circulation  of  the  bank  was  retired  with  the  proceeds,  and 
the  excess  over  circulation  was  returned  to  the  stockholders  of 
the  bank  by  the  Comptroller  in  the  form  of  a  dividend  of  four 
and  a  fraction  per  cent.  In  July,  1902,  the  bank  was  unani- 
mously voted  into  voluntary  liquidation  by  its  stockholders. 

The  action  of  the  court  in  appointing  a  receiver  for  this  bank 
recalls  to  mind  a  similar  incident  which  occurred  in  December, 
1903. 

A  press  dispatch  published  in  Washington  newspapers  an- 
nounced that  an  application  had  been  made  to  a  State  Court  for 
the  appointment  of  a  receiver  for  the  Windham  County  National 
Bank  of  Danielson,  Conn.,  and  that  a  hearing  had  been  arranged 
for  the  evening  of  the  same  day.  The  Acting  Comptroller  who 
was  in  charge  of  the  office  at  that  time,  upon  reading  this  an- 
nouncement immediately  communicated  by  telephone  with  the 
national  bank  examiner  for  the  district  in  which  the  bank  was 
located,  instructing  him  to  proceed  on  the  first  train  to  Daniel- 
son,  and  if  a  receiver  had  been  appointed  by  the  State  Court  to 
take  and  hold  possession  of  the  bank  in  the  name  of  the  Comp- 
troller of  the  Currency.  The  examiner,  after  traveling  all  night, 
reached  Danielson  the  following  morning,  and  upon  learning  that 
the  court  had  appointed  a  receiver  the  previous   evening,  went 


180  KOMANCE  AND  TRAGEDY  OF  BANKING 

immediately  to  the  bank  and  took  possession.  The  Court  receiver 
arrived  in  town  the  evening  before,  but  did  not  go  to  the  bank 
until  the  following  morning.  When  he  reached  the  bank  he  found 
the  national  bank  examiner  in  possession,  who,  in  the  meantime, 
had  been  appointed  receiver  bj  the  Acting  Comptroller.  The 
Court  receiver  demanded  possession  of  the  bank  by  virtue  of  his 
appointment,  but  the  bank  examiner  informed  him  that  he  was  in 
possession  by  authority  of  the  Comptroller  of  the  Currency  and 
declined  to  yield.  The  Court  receiver  informed  him  that  he 
would  report  the  situation  to  the  Court  for  instructions.  The 
differences  between  the  two  factions  in  the  bank,  which  was  the 
cause  of  the  association  being  placed  in  the  hands  of  a  receiver, 
were  shortl}"  afterward  adjusted  and  the  bank  was  permitted  to 
resume  business  on  January  15,  1904,  after  being  closed  about 
three  weeks,  which  disposed  of  the  question  of  jurisdiction  in  this 
case. 

These  two  cases  were  the  only  instances  in  which  the  State  or 
Federal  courts  had  interfered  with  the  Comptroller's  statutory 
prerogative  to  appoint  receivers  for  active  national  banks.  Peti- 
tions or  applications  had  been  made  to  the  courts  in  other  cases 
for  the  appointment  of  receivers  for  banks  in  which  there  had 
been  dissentions  between  directors  or  dissatisfaction  on  the  part 
of  stockholders  with  the  management,  but  whenever  the  Comp- 
troller of  the  Currency  insisted  upon  the  exercise  of  his  authority 
under  the  law,  the  courts  recognized  his  right,  but  at  the  same 
time  held  that  his  authority  to  appoint  a  receiver  was  not  ex- 
clusive, claiming  that  Courts  of  Equity  were  not  ousted  of  their 
jurisdiction  to  place  a  bank  in  the  hands  of  a  receiver  in  cases 
where,  according  to  the  rules  of  equity,  it  may  pursue  such  a 
course  with  regard  to  insolvent  corporations  generally. 

Annual  Report  of  Mr.  Hepburn 

The  one  annual  report  made  by  Mr.  Hepburn  to  Congress, 
covered  a  period  of  only  three  months  of  his  own  administration 
and  nine  months  of  that  of  his  predecessor.  In  this  report  he 
commented  upon  the  phenomenal  crop  production  of  the  United 
States  in  1891  and  the  important  part  it  played  in  alleviating 


ROMANCE  AND  TRAGEDY  OP  BANKING  181 

the  depressing  effects  of  the  severe  monetary  stringency  and 
resulting  failures  of  banks  and  business  concerns  during  the  two 
preceding  years. 

This  report  shows  that  the  value  of  the  merchandise  exported 
from  the  United  States  during  the  year  ended  July  1,  1892,  ex- 
ceeded one  billion  dollars,  the  partial  failure  of  the  cereal  crop 
in  Europe  having  created  an  unusual  demand  for  American  food 
products. 

A  remarkable  feature  to  which  Mr.  Hepburn  called  attention 
in  this  connection  was  the  fact  that  although  there  was  a  mer- 
chandise balance  in  favor  of  the  United  States  of  over 
$242,000,000,  which  under  ordinary  circumstances  would  have 
resulted  in  large  imports  of  gold,  the  gold  and  silver  exports  ex- 
ceeded imports  by  over  $86,000,000.  This,  he  stated,  was  due 
to  the  fact  that  the  short  crop  in  Europe  having  been  followed 
by  a  serious  financial  disturbance  it  became  necessary  for  Europe 
instead  of  paying  for  American  cereals  from  their  surplus  cash 
to  draw  upon  their  own  capital  invested  in  American  securities, 
which  were  returned  in  considerable  amounts.  Apprehension  of 
our  monetary  legislation  and  the  fear  that  this  country  was  drift- 
ing toward  a  silver  basis,  it  was  said,  created  distrust  of  our 
securities  abroad,  and  had  an  important  influence  on  gold  expor- 
tations. 

The  monetary  stringency  of  1890-91,  Mr.  Hepburn  thought^ 
was  wliolesome  in  its  effect  so  far  as  putting  a  check  upon  specu- 
lation, and  while  conditions  generally  in  1892  were  favorable  for 
a  year  of  average  prosperity,  caution  and  conservatism  charac- 
terized the  business  transactions  of  the  3^ear. 

In  this  report  Mr.  Hepburn  dwelt  at  length  upon  the  opera- 
tions of  the  Silver  Coinage  Act  of  February  28,  1878,  and  its 
repeal  by  the  Act  of  July  14,  1890.  He  also  discussed  the  pro- 
posed repeal  of  the  Act  of  March  3,  1865,  imposing  a  tax  of  ten 
per  cent,  on  State  bank  circulation,  and  drew  a  comparison 
between  the  old  State  bank  note  issues  and  the  circulation  of 
national  banks.  To  compare  one  with  the  other,  he  said,  was  like 
comparing  order  with  confusion,  and  a  perfect  system  under 
central  control  with  an  imperfect  system  under  diversified  control. 
The  most  notable  feature  of  State  bank  circulation,  he  said,  was 


182     ROMANCE  AND  TRAGEDY  OF  BANKING 

the  violent  expansion  and  contraction  to  which  it  was  subjected, 
and  its  loss  of  money  power  in  a  crisis.  It  was  a  source  of  weak- 
ness which  added  to  the  danger.  Instead  of  paying  debts,  it  came 
forward  itself  to  be  paid.  The  return  to  such  a  system,  he  said, 
would  produce  disaster  to  those  who  most  need  and  have  the  best 
right  to  governmental  protection  in  guaranteeing  to  them  a  safe 
and  sound  currency. 

In  closing  his  report  to  Congress  Mr.  Hepburn  devoted  a 
chapter  to  the  subject  of  the  duties  of  directors  of  banks.  His 
views  on  this  subject  were  those  of  a  practical  man  and  were  quite 
in  contrast  with  the  impractical  ideas  of  one  of  his  successors  in 
office,  as  indicated  by  a  list  of  questions  which  the  latter  in- 
structed the  bank  examiners  to  ask  directors  at  the  time  of  exam- 
ination of  their  banks. 

"Directors,"  Mr.  Hepburn  stated,  "give  direction  and  control 
to  the  business  of  a  bank,  accept  and  reject  credits,  and  should 
understand  its  general  condition.  The  detailed  workings  of  a 
bank  must  be  trusted  to  the  officers  and  employees.  We  cannot 
have  an^'thing  better  than  men.  Men  make  our  laws  and  men 
enforce  them.  Men  manage  our  banks.  No  matter  how  elaborate 
the  system,  how  numerous  the  checks  upon  error  or  upon  wrong- 
doing, or  however  perfect  the  machinery,  the  mechanism  must  be 
set  in  motion  and  the  system  operated  by  men.  There  is,"  he 
said,  "in  every  system  a  point  where  good  or  ill  results  depend 
upon  the  character  of  the  man  in  charge.  If  an  engineer  wants 
to  ditch  his  train,  he  can  do  so.  If  the  president  or  cashier  of  a 
bank  wants  to  rob  it,  he  can.  Well  devised  systems  may  make  it 
difficult.  Efficient  supervision  may  make  it  dangerous.  The  law 
may  punish,  and  the  certainty  of  detection  and  punishment  may 
reduce  the  risk  to  a  minimum.  Hence  the  chief  and  most  impor- 
tant duty  of  directors  is  to  select  officers  of  character  as  well  as 
of  experience  and  ability.  They  can  best  protect  themselves  and 
best  serve  the  public  by  so  doing." 

In  concluding  his  comments  on  the  duties  of  directors,  Mr. 
Hepburn  suggested  that  the  management  of  banks  could  be  sub- 
stantially reached  and  corrected  if  the  Comptroller,  with  the 
approval  of  the  Secretary  of  the  Treasury,  were  given  power, 
after  a  hearing,  to  remove  bank  officers  and  directors  for  viola- 


KOMANCE  AND  TRAGEDY  OF  BANKING  183 

tions  of  law,  leaving  the  vacancies  to  be  filled  in  the  regular  way. 
Such  a  power,  he  thought,  would  be  seldom  exercised,  but  its  ex- 
istence would  deter  many  bank  officers  who  now  observe  the  letter, 
only  to  violate  the  spirit  of  the  law.  The  existence  of  this  author- 
ity would  also,  he  believed,  have  the  effect  of  commanding  more 
respect  on  the  part  of  officers  and  directors  of  banks  for  the  re- 
quirements and  directions  of  the  Comptroller  in  connection  with 
the  prompt  correction  of  bad  practices  and  unsatisfactory  con- 
ditions called  to  their  attention  through  the  reports  of  bank 
examiners. 

Amendments  Recommended 

Among  the  amendments  to  the  national  banking  laws  recom- 
mended by  Mr.  Hepburn,  which  have  not  since  been  adopted,  are 
the  following: 

1.  That  the  tax  on  national  bank  circulation  be  repealed  and 
that  the  banks  be  assessed  only  for  an  amount  sufficient  to  defray 
the  actual  cost  to  the  Government  of  providing  circulation. 

2.  That  the  Comptroller  of  the  Currency,  with  the  approval 
of  the  Secretary  of  the  Treasury,  be  empowered  to  remove  officers 
and  directors  of  a  bank  for  violations  of  law  after  due  hearing. 

3.  That  the  officers  and  employees  of  a  bank  be  prohibited 
from  borrowing  its  funds  in  any  manner,  except  upon  application 
to  and  approval  of  the  board  of  directors. 

4.  In  order  to  facilitate  the  collection  of  assessments  upon 
shareholders  in  failed  banks,  that  the  receivers  of  such  banks  be 
authorized  to  file  with  the  County  Clerk  or  Register  of  each 
county  in  which  any  stockholder  may  reside  a  statement  showing 
the  names  of  shareholders  residing  in  such  county  and  the  amount 
of  stock  held  by  them  respectively ;  the  filing  of  such  statement 
to  constitute  a  lien  upon  the  realty  of  such  stockholders,  which 
lien  could  be  vacated  by  giving  proper  bond,  or  be  discharged 
by  the  receiver  upon  payment  of  the  assessment. 

5.  That  Section  380,  United  States  Revised  Statutes,  be 
amended  to  permit  attorneys  other  than  United  States  Attorneys 
to  be  employed  by  receivers  of  failed  banks,  whenever,  in  the  opin- 
ion of  the  Comptroller,  such  employment  would  be  for  the  best 
interest  of  a  trust. 


184  ROMANCE  AND  TRAGEDY  OF  BANKING 

This  last  amendment  was  recommended  because  of  the  insist- 
ence of  some  United  States  Attorneys  upon  the  recognition  by 
the  Comptroller  of  their  statutory  right  to  represent  receivers 
of  national  banks  in  all  litigation  for  collecting  debts  due  failed 
banks  and  to  receive  the  emoluments  therefrom. 

Mr.  Hepburn  explained  the  disadvantages  attending  the  em- 
ployment of  United  States  Attorneys  in  such  matters  and  the 
greater  expense  and  delay  involved,  as  compared  with  the  advan- 
tages in  every  respect  of  the  receiver  employing  an  attorney  of  his 
own  selection. 

While  the  Section  of  the  Revised  Statutes  referred  to  has  not 
been  amended,  United  States  Attorneys  have  not  insisted  upon 
their  right  to  represent  receivers  of  failed  national  banks  since 
the  decision  of  the  Supreme  Court  of  the  United  States  in  the 
case  of  Gibson  v.  Peters,  150  U.  S.,  342,  to  the  effect  that  the 
expenses  of  a  receivership  cannot  be  held  to  include  compensation 
of  a  district  attorney  for  conducting  a  suit  in  which  the  receiver 
is  a  party,  and  he  cannot  receive  any  compensation  for  services 
rendered  or  offered  to  be  rendered  a  receiver. 

In  support  of  his  first  recommendation,  Mr.  Hepburn  ad- 
vanced the  argument  that  national  banks  were  no  longer  organ- 
ized for  the  purpose  of  issuing  circulation.  If  the  system  is  to 
be  perfected  and  perpetuated,  he  stated,  it  was  incumbent  upon 
Congress  to  recognize  the  fact  that  it  must  be  made  less  burden- 
some and  more  profitable  to  the  banks,  not  only  by  a  reduction 
of  taxation,  but  by  an  enlargement  of  the  scope  of  their  corporate 
powers,  to  enable  them  to  meet  to  a  greater  degree  the  competi- 
tion of  other  banking  institutions  operating  under  State  author- 
ity. State  banks  and  trust  companies  had  for  years  gradually 
but  steadily  encroached  upon  the  business  of  national  banks,  until 
they  had  absorbed  such  a  large  proportion  of  the  banking  busi- 
ness of  their  respective  communities  as  to  make  it  very  difficult, 
if  not  impossible,  in  some  sections,  for  national  associations  to 
compete  with  them  within  the  limitations  of  their  corporate 
powers  and  statutory  restrictions. 

Mr.  Hepburn's  recommendation  for  a  repeal  of  the  tax  on 
circulation  is  one  which  Congress   should    adopt.       The    banks 


ROMANCE  AND  TRAGEDY  OF  BANKING  185 

should  be  assessed  only  for  an  amount  sufficient  to  reimburse  the 
Government  for  the  actual  cost  of  providing  circulation. 

The  total  expenses  of  the  Government  for  maintenance  of  the 
Currency  Bureau  from  the  date  of  its  organization  in  May,  1863, 
to  June  30,  1921,  exclusive  of  contingent  expenses,  amounted  to 
$20,965,816.00.  Since  1863  the  banks  have  paid  into  the  Treasury 
of  the  United  States  over  $155,188,318.73  in  taxes  upon  circula- 
tion, an  amount  considerably  more  than  ample  to  pay  the  entire 
cost  of  operating  the  Bureau  during  its  existence,  including  the 
cost  of  examinations  by  national  bank  examiners.  During  the  same 
period  the  banks  have  lost  millions  of  dollars  by  depreciation  in 
the  market  value  of  Government  bonds. 

Mr.  Hepburn  made  other  recommendations  for  amendments 
to  the  banking  laws,  some  of  which  have  been  adopted,  in  whole 
or  in  part,  and  others  have  been  partly  effected  by  administrative 
regulations. 

The  most  important  of  his  recommendations  in  its  bearing 
upon  the  business  of  the  banks  and  its  effect  upon  the  security  of 
creditors,  was,  perhaps,  his  proposed  amendment  of  Section  5200 
of  the  Revised  Statutes  fixing  the  limit  of  loans. 

Since  the  report  containing  his  views  on  this  subject  was 
published,  the  law  was  amended  increasing  the  limit  of  a  loan  that 
might  be  made  to  any  person,  company,  corporation  or  firm,  to 
an  amount  equal  to  ten  per  centum  of  the  unimpaired  capital  and 
surplus  of  the  bank,  but  not  exceeding  thirty  per  centum  of  the 
capital.  A  bank  with  a  surplus  equal  to  twice  the  amount  of  its 
capital,  under  this  law,  could  make  a  loan  equal  to  thirty  per  cent, 
of  its  capital,  but  a  bank  with  surplus  in  excess  of  twice  its  capi- 
tal was  restricted  to  the  thirty  per  cent,  limit,  no  matter  what 
its  surplus  might  be.  There  are  not  many  banks  that  have  a 
surplus  fund  greater  than  double  the  amount  of  their  capital. 

The  amendment  limiting  loans  to  thirty  per  cent,  of  capital 
was  repealed  by  later  legislation  authorizing  loans  to  be  made  to 
an  amount  equal  to  ten  per  centum  of  the  unimpaired  capital  and 
surplus  and  in  addition  thereto  the  discount  of  notes  under  cer- 
tain conditions  and  restrictions. 

The  purpose  of  our  legislators  in  fixing  a  limitation  upon 
surplus  was  to  discourage  the  formation  of  banks  with  a  small 


186  ROMANCE  AND  TRAGEDY  OF  BANKING 

capital  and  a  large  surplus,  with  a  correspondingly  limited  stock 
liability.  Formerly  banks  supplied  the  wants  of  their  customers 
from  capital  furnished  by  their  stockholders,  and  made  their 
profits  through  loaning  or  investing  their  own  funds.  Now  the 
tendency  seems  to  be  to  contribute  as  small  an  amount  of  capital 
as  is  necessary  to  command  public  confidence,  or  is  permissible 
under  the  law,  and  to  do  business  upon  the  funds  furnished  by 
depositors.  This  makes  it  all  the  more  necessary  that  the  inter- 
ests of  the  creditors  of  the  banks  should  be  protected  as  fully  as 
possible  by  well-defined  restrictions  in  regard  to  loans  and 
investments. 

The  only  amendment  to  the  banking  laws  enacted  during  Mr. 
Hepburn's  administration,  notwithstanding  the  number  that  were 
recommended,  was  the  Act  of  August  3,  1892,  amending  the  Act 
of  June  30,  1876,  in  regard  to  the  appointment  of  an  agent  by 
the  stockholders  of  an  insolvent  association  to  liquidate  the  re- 
maining assets  after  the  depositors  and  other  creditors  of  the 
bank  had  been  paid  in  full  by  the  receiver.  This  amendment 
simply  authorized  the  stockholders  to  elect  whether  they  should 
appoint  an  agent  to  wind  up  the  bank  in  their  interests  or  allow 
the  receiver  to  do  so. 


JAMES  H.  ECKELS 
Comptroller  of  the  Currency,  1893-1897 


CHAPTER  XI 

James  H.  Eckels 

JAMES  H.  ECKELS,  the  ninth  Comptroller  of  the  Currency, 
was  appointed  April  26,  1893,  and  served  until  December  31, 
1897,  a  period  of  four  years  and  eight  months. 

Mr.  Eckels  was  born  in  Princeton,  111.,  November  22,  1858, 
and  was  thirty-five  years  of  age  when  appointed  Comptroller, 
although  in  appearance  he  did  not  look  to  be  more  than  twenty- 
five.  Smooth  face,  light  complexion,  small  of  stature  and  deli- 
cate, he  had  the  appearance  of  a  youth.  He  attended  the  public 
schools  of  his  native  city  and  graduated  at  the  High  School  at 
Princeton,  111.,  in  1876.  He  attended  law  school  at  Albany,  N. 
Y.,  and  graduated  in  1880.  While  in  Albany  he  made  the  ac- 
quaintance of  Grover  Cleveland,  who  was  then  Governor  of  New 
York,  and  Daniel  Lamont,  who  was  then  Governor  Cleveland's 
secretary.  This  acquaintanceship  laid  the  foundation  for  the 
prominence  which  Mr.  Eckels  attained  in  later  years  in  the  finan- 
cial world. 

In  1881  he  commenced  the  practice  of  law  at  Ottawa,  111., 
and  continued  in  pratice  until  his  appointment  as  Comptroller 
of  the  Currency  by  President  Cleveland  in  1893.  During  the 
Presidential  campaign  of  1892,  he  took  an  active  part  in  support 
of  his  friend,  the  Democratic  nominee,  and  made  a  number  of 
speeches,  principally  on  the  tariff  question. 

Previous  to  his  appointment  as  Comptroller,  Mr.  Eckels  was 
entirely  without  banking  experience.  He  was  an  applicant  for 
appointment  as  United  States  Attorney  for  the  district  in  Illinois 
in  which  he  resided,  and  no  one  was  surprised  more  than  he  when 
President  Cleveland  nominated  him  for  the  position  of  Comptrol- 
ler of  the  Currency.  At  first  it  was  reported  that  the  President 
had  made  a  mistake  in  sending  his  nomination  to  the  Senate  for 
Comptroller  instead  of  for  the  position  of  United  States  Attor- 
ney, but  when  President  Cleveland's  attention  was  called  to  the 
matter  he  declared  that  no  mistake  had  been  made.    He  expressed 

187 


188  ROIVIANCE  AND  TRAGEDY  OF  BANKING 

great  confidence  in  Mr.  Eckels'  ability,  and  desired  to  give  him  & 
better  position  than  that  of  United  States  Attorney.  Mr.  Eckels 
happened  to  be  at  the  Capitol  at  the  time  his  nomination  was 
received  at  the  Senate,  and  stated  to  some  of  the  newspaper  cor- 
respondents, when  they  told  him  of  the  nomination,  that  that  was 
the  first  information  he  had  of  the  President's  purpose.  When 
asked  what  experience  he  had  had  in  banking  to  qualify  him  for 
the  place,  he  candidly  replied  that  he  had  had  none  whatever, 
except  as  a  borrower. 

Up  to  this  time  it  had  been  the  invariable  rule  to  appoint  no 
one  to  the  office  of  Comptroller  of  the  Currency  who  had  not  had 
a  banking  experience,  and  there  was  considerable  doubt  at  the 
time  whether  the  Senate  would  break  away  from  this  practice  and 
confirm  the  nomination.  Ex-Comptroller  Lacey  happened  to  be 
in  Washington  when  the  nomination  of  Mr.  Eckels  was  made, 
and  knowing  Mr.  Eckels  personally  and  having  a  high  regard 
for  his  ability,  was  largely  instrumental  in  overcoming  the  objec- 
tions to  his  confirmation,  and  dispelling  the  impression  that 
seemed  to  prevail  that  only  a  practical  banker  of  long  experience 
was  qualified  to  satisfactorily  fill  the  office  of  Comptroller.  In  a 
published  newspaper  interview  at  that  time,  Mr.  Lacey  expressed 
the  opinion  that  the  position  was  one  that  called  for  a  man  of 
good  business  judgment  and  discretion  more  than  of  banking 
experience  or  legal  training,  and  while  a  banking  experience  would 
be  ver}'  helpful  it  was  not  essential  to  a  successful  administration 
of  the  Bureau.  The  duties  of  the  Comptroller  of  the  Currency, 
he  stated,  were  well  defined  by  statute,  and  a  succsesful  adminis- 
tration of  the  office  required  only  the  exercise  of  good  business 
judgment,  discretion  and  conservatism. 

Mr.  Eckels  always  gratefully  remembered  the  services  ren- 
dered him  by  Mr.  Lacey  on  this  occasion,  and  while  the  nomina- 
tion would  no  doubt  ultimately  have  been  confirmed  bv  the  Senate, 
he  believed  that  his  confirmation  was  very  materially  accelerated 
by  Mr.  Lacey's  timely  assistance,  and  the  latter's  judgment  as 
to  the  qualifications  necessary  to  insure  a  successful  administra- 
tion of  the  office  was  fully  verified  by  Mr.  Eckels'  appointment. 

Shortl}'  following  his  appointment,  Mr.  Eckels  was  the  recipi- 
ent of  a  dinner  given  in  his  honor  by  some  of  his  fellow-townsmen 


ROMANCE  AND  TRAGEDY  OF  BANKING  189 

of  Ottawa,  III.  In  a  speech  delivered  on  that  occasion,  he  availed 
himself  of  the  opportunity  afforded  him  to  reply  to  some  of  the 
criticisms  that  had  been  made  of  his  selection  as  a  practicing 
attorney,  of  limited  experience,  to  preside  over  the  affairs  of  a 
Bureau  distinctively  financial,  and  said: 

No  impairment  of  any  system  can  be  brouglit  about  by 
an  honest  and  rigid  enforcement  of  the  laws  which  govern 
it,  and  those  most  strenuous  in  their  criticisms  must  not 
complain  if  the  National  Bank  Act  as  it  stands  on  the 
statute  book,  be  the   rule   and   guide   of  the   Comptroller. 

The  danger  has  always  been  the  indifference  of  bank 
officials  to  keeping  within  the  restrictions  of  law  and  not 
of   the    Comptroller's    exceeding   his    authority. 

He  declared  that  it  would  be  his  purpose  to  strive  always 
to  see  that  the  law  was  observed,  that  business  and  moral 
integrity  should  characterize  those  who  were  connected  with 
the  Comptroller's  bureau,  and  that  in  no  instance  should  the 
public  interests  be  sacrificed  to  political  expediency. 

Thus  did  Mr.  Eckels  in  brief  outline  his  policy  and  express 
his  conception  of  his  duties  and  responsibilities,  and  who  can  say 
that  a  practical  banker  would  have  discharged  the  duties  of  the 
position  with  more  credit  to  himself,  the  administration  which  he 
represented,  and  the  interests  of  the  public  at  large  during  the 
exceptional  period  of  Mr.  Eckels'  incumbency,  than  this  unknown 
lawyer  from  Ottawa. 

Considering  his  utter  lack  of  experience  in  banking  at  the 
time  he  assumed  charge  of  the  Currency  Bureau,  and  the  extra- 
ordinary conditions  which  immediately  followed  his  induction  into 
office,  his  administration  of  the  Bureau  and  the  soundness  of  his 
views  as  expressed  in  his  annual  reports  to  Congress  and  in  his 
public  addresses  and  writings  will  compare  favorably  with  those 
of  any  of  the  experienced  and  practical  bankers  who  preceded  or 
followed  him.  It  was  recognition  of  his  natural  ability  that 
led  Secretary  Lyman  J.  Gage  to  remark  that  "there  was  not  much 
to  Eckels,"  referring  to  his  stature,  "but  what  little  there  was 
was  three-quarters  brains." 


190  ROMANCE  AND  TRAGEDY  OF  BANKING 

Mr.  Eckels  resigned  the  office  of  Comptroller  on  December  31, 
1897,  near  the  end  of  his  five-year  term,  to  accept  the  presidency 
of  the  Commercial  National  Bank  of  Chicago,  Avhich  position  he 
retained  until  the  date  of  his  death.  He  died  suddenly  in  Chi- 
cago, of  heart  disease,  in  April,  1907. 

Panic  of  1893 

Within  a  little  more  than  a  month  after  Mr.  Eckels  assumed 
charge  of  the  Currency  Bureau  the  country  was  plunged  into  one 
of  the  most  violent  and  memorable  financial  panics  in  its  history. 
National,  State  and  private  banks  failed  in  quick  succession,  and 
the  business  of  the  entire  country  became  paralyzed.  During  the 
six  months  immediately  following  Mr.  Eckels'  induction  into  office, 
one  hundred  and  fifty-eight  national  banks  suspended  and  closed 
their  doors,  sixty-five  of  which  were  found  to  be  insolvent  and 
were  placed  in  the  hands  of  receivers,  eighty-six  resumed  business 
and  seven  were  placed  in  the  hands  of  bank  examiners  in  expecta- 
tion of  their  resumption.  The  weakest  banks  were  the  first  to 
succumb.  Many  failures  were  due  to  speculation,  and  some  to 
dishonesty.  In  some  communities  depositors  were  seized  with 
panic,  making  it  impossible  for  the  banks  to  meet  their  demands, 
and  numerous  suspensions  occurred  where  no  stigma  attached  to 
the  management,  and  the  banks  were  in  a  solvent  condition. 

During  this  trying  ordeal,  such  as  no  Comptroller  of  the  Cur- 
rency ever  was  called  upon  before  to  undergo,  Mr.  Eckels,  inex- 
perienced as  he  was,  even  in  the  detail  workings  of  the  Bureau, 
discharged  the  onerous  duties  of  the  office  with  rare  skill  and  good 
judgment,  and  not  only  quickly  disarmed  the  opposition  invoked 
by  his  appointment,  but  inspired  the  confidence  of  the  entire  bank- 
ing and  business  interests  of  the  country  and  contributed  very 
materially  toward  allaying  the  excitement  superinduced  by  the 
panic  and  the  restoration  of  confidence. 

Perhaps  no  one  connected  with  the  Treasury  Department  at 
that  time  shared  with  Mr.  Eckels  the  strain  of  the  trying  ordeal 
of  this  panic  more  than  the  writer,  who  was  then  the  Comptroller's 
secretary,  or  had  equal  opportunity  for  knowing  how  skilfully, 
manfully  and  energetically  he  met  and  handled  the  situation.    For 


ROMANCE  AND  TRAGEDY  OF  BANKING  191 

weeks  there  was  no  rest,  night  or  day.  Every  hour  of  the  day  and 
late  into  the  night  telegram  after  telegram  was  received  announc- 
ing additional  suspensions  of  banks  or  new  complications  which 
had  to  be  promptly  met.  As  many  as  thirty  suspensions  occurred 
in  a  single  day,  and  for  a  time  it  looked  as  if  every  national  bank 
in  the  system  would  succumb.  Telegrams  from  bank  examiners 
and  bankers  came  in  such  quick  succession  that  the  entire  time 
of  the  Comptroller  and  the  writer  was  occupied  in  translating 
cipher  messages  and  in  sending  replies  or  instructions.  Messages 
came  so  thick  and  fast  that  it  was  impossible  to  file  them  away  in 
any  order  for  reference,  and  the  expedient  was  resorted  to  of  fil- 
ing each  day's  messages  on  a  spindle  marked  with  the  date  of  their 
receipt,  until  there  was  a  spindle  for  every  day  in  the  week,  and 
a  row  for  each  week,  with  telegrams  six  inches  deep,  on  each  file. 

Among  the  stream  of  messenger  boys  who  poured  into  the 
office  all  day  long  was  one  who  had  a  defective  or  blind  eye,  whom 
Mr.  Eckels  called  "The  bird  of  evil  omen."  Every  message  he 
delivered  announced  another  suspension,  so  that  whenever  this 
boy  entered  the  Comptroller's  room  Mr.  Eckels  would  remark, 
"Here  comes  another  bust." 

The  greatest  difficulty,  however,  that  Mr.  Eckels  encountered 
during  this  trying  occasion  was  in  quickly  finding  reliable  and 
competent  men  to  place  in  charge  of  the  suspended  associations, 
either  as  examiner  or  receiver.  All  of  the  examiners  in  the  sec- 
tions where  suspensions  were  most  numerous  were  already  in 
charge  of  failed  banks,  and  some  of  them  were  in  charge  of  sev- 
eral, with  an  assistant  assigned  to  each  to  manage  its  affairs 
under  their  supervision,  and  every  available  man  who  had  had 
any  previous  experience  as  a  receiver  or  examiner  was  pressed 
into  service  and  given  an  appointment. 

When  a  national  bank  closes  its  doors  it  is  necessary  to  place 
a  representative  of  the  Comptroller  in  charge  of  its  affairs  as 
promptly  as  possible,  in  order  to  collect  and  protect  maturing 
paper  and  the  interests  of  all  the  creditors  alike,  so  that  no  cred- 
itor will   secure  preference  over   another  by  withdrawal   of  his 

deposit. 

Considering  the  haste  with  which  the  Comptroller  was  com- 
pelled to  act  in  making  his  selections,  and  his  lack  of  knowledge 


192     ROMANCE  AND  TRAGEDY  OF  BANKING 

of  the  antecedents  of  many  of  the  men  appointed  to  take  charge 
of  banks,  it  is  remarkable  that  so  few  mistakes  were  made  and  that 
such  good  judgment  was  displayed  by  those  who  were  appointed 
receivers  in  the  management  of  the  affairs  of  their  trusts  and  the 
good  results  attained,  many  of  whom  never  having  had  any  experi- 
ence in  the  liquidation  of  an  insolvent  bank. 

The  Model  Receiver 

Of  the  large  number  of  receivers  appointed,  and  of  examiners 
placed  in  charge  of  suspended  institutions,  only  one  man  proved 
to  be  a  recreant  to  his  trust  and  the  confidence  reposed  in  hira 
by  the  Comptroller.  This  man  had  been  connected  with  the  Comp- 
troller's office  for  years  previous  to  the  panic  of  1893,  and  had 
such  a  record  for  efficiency  and  good  results  obtained  for  cred- 
itors, that  he  was  regarded  as  the  "banner  receiver"  of  the  office 
and  a  model  for  imitation  by  all  newcomers.  He  was  appointed 
receiver  for  several  banks  during  the  panic,  had  been  receiver  for 
others  before  Mr.  Eckels'  appointment  as  Comptroller,  and  was 
the  principal  reliance  of  the  office  to  instruct  other  receivers  in 
their  work.  It  was  discovered  later  that  in  a  number  of  receiver- 
ships under  his  charge  he  had  systematically  appropriated  to  his 
own  use  part  of  his  cash  collections,  diamonds,  jewelry  and  other 
valuable  assets  of  the  trusts,  and  did  it  in  such  an  adroit  manner 
that  it  was  impossible  to  obtain  such  proofs  against  him  as  would 
sustain  a  prosecution  or  a  claim  against  his  bondsmen. 

Ex-Convict  Receiver  and  Examiner 

The  most  remarkable  case,  however,  was  that  of  the  appoint- 
ment of  an  ex-convict  as  bank  examiner  and  receiver.  Previous 
to  his  appointment  this  man  called  in  person  upon  Mr.  Eckels 
and  presented  letters  of  recommendation  from  a  number  of  the 
leading  public  men  of  his  State.  He  was  a  man  of  good  appear- 
ance and  address,  and  he  made  such  a  favorable  impression  upon 
Mr.  Eckels  that  he  concluded  to  avail  himself  of  his  services.  He 
appointed  him  a  national  bank  examiner,  and  assigned  him  to 
duty  in  charge  of  a  failed  bank,  of  which  he  was  later  appointed 


ROIVIANCE  AND  TRAGEDY  OF  BANKING  193 

receiver.  After  he  had  been  in  the  service  several  months,  Mr. 
Eckels  received  a  communication  from  a  party  in  the  city  where 
the  bank  was  located,  stating  that  this  man  was  an  ex-convict, 
having  served  a  term  of  five  years  in  the  penitentiary.  He  looked 
up  the  recommendations  on  which  he  was  appointed  and  refused 
to  believe  that  the  accusation  could  be  true.  He  wired  the  re- 
ceiver in  cipher  informing  him  of  the  charge  that  had  been  made 
against  him  and  requested  an  immediate  reply  by  wire  confirm- 
ing or  denying  the  accusation.  He  was  astounded  upon  receiving 
a  reply  acknowledging  the  truth  of  the  charge  and  stating  that 
a  full  explanation  by  mail  would  follow.  The  mail  promptly 
brought  the  explanation,  in  which  this  man  candidly  admitted 
that  several  years  previously  he  had  been  convicted  of  a  criminal 
offense,  stated  its  nature,  and  had  been  sentenced  to  and  served 
a  term  in  the  penitentiary.  He  stated  further  that  he  was  quite 
a  young  man  when  he  went  astray,  had  paid  the  penalty  of  his 
wrongdoing,  and  after  serving  his  sentence  had  returned  to  the 
same  city  in  which  he  was  tried  and  convicted  determined  to  start 
life  anew  and  re-establish  himself  in  the  confidence  of  his  friends 
and  the  community.  He  invited  the  closest  scrutiny  into  his  life 
before  his  conviction  and  his  career  subsequent  to  his  release  from 
the  penitentiary,  and  also  his  acts  as  examiner  and  receiver.  He 
advised  the  Comptroller  that  the  party  who  informed  on  him  was 
an  applicant  for  appointment  as  attorney  for  his  trust,  but  as 
he  did  not  believe  that  it  would  be  for  the  best  interests  of  the 
receivership  to  appoint  him,  he  declined  to  recommend  the  ap- 
pointment, thereby  incurring  his  displeasure  and  resulting 
exposure. 

Mr.  Eckels  made  careful  inquiry  into  the  history  of  this  re- 
ceiver and  with  the  exception  of  the  offense  for  which  he  was  con- 
victed learned  nothing  to  his  discredit.  He  also  made  a  thor- 
ough examination  of  the  receivership  and  found  everything  satis- 
factory and  the  books  in  excellent  condition. 

The  friends  of  this  man,  among  whom  were  some  men  of  prom- 
inence, had  absolute  confidence  in  him  and  the  sincerity  of  his 
declared  purpose  to  redeem  himself  if  given  an  opportunity  to  do 
right,  and  stood  by  him.  They  urged  Mr.  Eckels  to  continue  him 
in  office  and  he  did  so  for  several  months  thereafter.     Finally  he 


194  ROI^IANCE  AND  TRAGEDY  OF  BANKING 

concluded  that  he  was  assuming  too  great  a  responsibility  in  con- 
tinuing a  man  in  a  fiduciary  position  whom  he  knew  to  have  served 
a  term  in  the  penitentiary,  and  would  be  justly  subject  to  censure 
if  anything  went  wrong.  He  therefore  reluctantly,  as  he  said  at 
the  time,  requested  his  resignation.  The  resignation  was  promptly 
forwarded  and  a  successor  was  appointed.  All  the  assets  of  the 
trust  were  carefully  checked  up,  every  dollar  that  came  into  the 
hands  of  the  receiver  was  fully  accounted  for,  and  everything 
found  to  be  in  a  satisfactory  condition.  During  the  brief  period 
of  this  man's  connection  with  the  Treasury  Department  there  was 
not  a  fault  to  be  found  with  his  record.  He  discharged  his  duty 
honestly,  faithfully  and  efficiently,  and  it  was  with  great  regret 
that  Mr.  Eckels  felt  constrained  to  request  his  resignation. 

In  later  years  it  was  learned  at  the  office  of  the  Comptroller 
that  he  went  wrong  again.  He  became  involved  in  other  ques- 
tionable transactions,  and  the  reports  concerning  him  were  to  his 
discredit. 

Those  who  were  connected  with  the  Comptroller's  office  at  that 
time  and  were  familiar  with  this  man's  history  always  entertained 
the  opinion  that  perhaps  if  he  had  been  trusted  and  encouraged 
he  might  have  developed  into  an  honest  and  reputable  citizen. 
Who  can  tell?  But  the  exposure  of  his  penitentiary  career  and 
his  removal  from  office  in  consequence  sent  him  out  into  the  world 
again  broken  in  spirit  and  discouraged,  like  Bob  Brierly  in  the 
"Ticket-of-Leave  Man,"  with  the  brand  of  an  ex-convict  barring 
the  way  to  his  making  an  honest  living  in  any  position  of  trust. 
The  way  of  the  transgressor  is  hard  and  this  man  was  forced  to 
realize  it. 

Suspensions  During  the  Panic  of  1893 

Returning  to  the  subject  of  the  panic  of  1893,  of  the  one 
hundred  and  fifty-eight  national  banks  that  suspended  during  the 
report  year  of  that  period,  thirty-eight  were  in  the  Southern 
States,  forty-nine  in  the  Western  States,  sixty-six  in  the  Pacific 
States  and  Territories,  two  in  the  New  England  States,  and 
three  in  the  Middle  States.  Of  the  suspensions  in  the  Southern 
States  nineteen  resumed  business  and  the  same  number  failed.  Of 
those  that  suspended  in  the  Western  States  thirty-one  resumed 


ROMANCE  AND  TRAGEDY  OF  BANKING  195 

business  and  seventeen  failed.  In  the  Pacific  States  thirty-six 
resumed  business  and  twenty-five  went  into  the  hands  of  receivers. 
Receivers  were  appointed  for  both  of  the  banks  that  suspended  in 
the  New  England  States  and  for  two  of  those  in  the  Middle 
States. 

During  the  first  eight  months  of  1893,  Bradstreet's  Agency 
reported  four  hundred  and  fifteen  bank  failures  of  all  kinds, 
national.  State  and  private,  and  loan  and  trust  companies.  The 
assets  of  these  four  hundred  and  fifteen  institutions  were  reported 
as  aggregating  $94,291,348,  and  their  liabilities  as  $97,193,530. 

A  large  percentage  of  the  national  banks  that  were  compelled 
to  close  their  doors  were  unquestionably  solvent,  as  their  early 
resumption  of  business  fully  demonstrated.  They  were  forced  to 
suspend  because  of  their  inability  to  realize  immediately  on  their 
assets  cash  sufficient  to  meet  the  demands  of  their  panic-stricken 
depositors,  without  a  ruinous  sacrifice.  While  the  suspension  of 
a  bank  under  ordinary  conditions  would  be  presumptive  evidence 
of  insolvency  and  justify  the  placing  of  the  association  in  the 
hands  of  a  receiver,  Mr.  Eckels  very  wisely  drew  a  distinction 
between  a  suspended  solvent  institution  and  one  which  he  knew 
or  had  good  reason  to  believe  was  insolvent.  The  former  he 
assisted  in  every  proper  way  and  encouraged  them  to  resume 
business,  and  the  latter  he  immediately  placed  in  the  hands  of 
receivers  to  wind  up  their  affairs.  No  bank  was  permitted  to 
resume  business  whose  assets  were  not  believed  to  be  sufficient 
to  pay  its  liabilities  to  depositors  and  other  creditors  in  full  over 
and  above  an  unimpaired  capital. 

In  some  instances  Mr.  Eckels  was  severely  criticised  by  depos- 
itors who  were  clamorous  for  their  money,  but  he  calmly  pursued 
the  even  tenor  of  his  way  and  did  what  he  believed  to  be  for  the 
best  interests  of  all  concerned. 

In  replying  to  some  of  his  critics  who  demanded  the  appoint- 
ment of  receivers  for  suspended  associations  which  he  had  good 
reason  to  believe  were  solvent  and  were  able  to  pay  their  creditors 
in  full,  he  stated  that  he  proposed  to  exercise  to  the  fullest  extent 
the  discretion  vested  in  him  by  law,  by  aiding  in  every  legitimate 
manner  every  suspended  solvent  institution  to  resume  business  at 
the  earliest  possible  moment  as  the  best  means  of  quickly  restor- 


196     ROMANCE  AND  TRAGEDY  OF  BANKING 

ing  confidence  and  a  return  to  normal  conditions,  and  suggested 
that  his  critics  would  better  contribute  toward  this  end  by  co- 
operating with  him  in  this  endeavor  instead  of  finding  fault  with 
him  in  his  cfi'orts  to  do  so.  The  results  of  Mr.  Eckels'  policy  in 
this  respect  justified  the  course  that  he  pursued  and  proved  the 
wisdom  of  his  judgment. 

ShrinJcage  in  Assets  and  Liabilities 

A  comparison  of  the  figures  in  the  report  of  the  Comptroller 
for  1893  with  those  of  the  report  of  1892  shows  a  shrinkage  of 
$400,531,613  in  the  aggregate  resources  and  liabilities  of  the 
national  banks  during  that  period,  and  indicates  the  extent  to 
which  the  national  banks  of  the  country  suffered  from  the  excep- 
tionally severe  monetary  stringency  that  prevailed  chiefly  between 
May  4  and  October  3  of  that  year.  During  this  period  $298,- 
806,487  and  $79,313,076  of  individual  and  bank  deposits,  respec- 
tively, were  withdrawn  from  the  banks.  To  meet  these  with- 
drawals, loans  and  discounts  were  reduced  $318,767,691,  and  due 
from  banks  and  bankers  $51,198,856.  To  provide  against  fur- 
ther withdrawals  of  deposits  the  banks  increased  their  liabilities 
for  money  borrowed  $36,615,092,  and  added  to  their  circulation 
$31,265,616,  of  which  amount  $27,888,905  was  taken  out  between 
July  and  October,  1893.  The  cash  resources  of  the  banks 
amounted  to  $32,559,267  less  on  July  12  than  on  May  4,  1893, 
but  between  the  latter  date  and  October  3,  of  the  same  year,  they 
increased  $59,520,100,  aggregating  on  the  latter  date  $369,- 
862,637,  the  largest  amount  ever  held  up  to  that  time. 

This  showing,  in  the  face  of  continued  heavy  withdrawals  of 
deposits,  Mr.  Eckels  stated  in  his  report  for  1893,  was  the  most 
practical  demonstration  that  could  be  had  of  the  solvency  of  the 
national  banks  as  a  whole  and  their  ability  in  an  emergency  to 
rapidly  convert  their  assets  into  cash. 

Cause  of  the  Crisis  of  1893 

Immediately  following  this  panic  and  since,  various  theories 
were  and  have  been  advanced  by  financial  experts  and  political 
economists  as  to  the  causes  which  produced  this  crisis.     Hetero- 


ROMANCE  AND  TRAGEDY  OF  BANKING  197 

geneous  and  contradictory  financial  legislation  during  the  preced- 
ing twenty  years  was  held  by  some  to  be  responsible.  The  legis- 
lation of  that  period,  it  was  contended,  consisted  of  a  series  of 
compromises  between  a  desire  to  maintain  an  honest  standard  of 
values  and  an  effort  to  conciliate  financial  heresies,  instead  of  a 
determination  to  combat  them.  Inelasticity  of  our  currency  and 
the  consequent  inability  of  the  banks  to  issue  circulation  sufficient 
to  meet  the  demands  of  their  depositors  and  customers,  without 
an  investment  of  an  equal  amount  in  United  States  bonds,  was 
held  to  be  another  cause  for  the  panic,  implying  thereby  that 
there  was  a  scarcity  of  circulation  at  that  time.  Others  still 
claimed  that  the  inception  of  panics  generally  may  be  traced  to 
currency  inflation  and  the  speculation  that  an  inflated  currency 
usually  promotes  with  all  its  kindred  evils. 

While  all  these  causes,  and  numerous  others  which  have  been 
advanced  as  having  had  an  influence  in  bringing  about  the  general 
disturbance  that  occurred  in  1893,  the  primary  causes  which 
led  to  this  panic  may  be  looked  for  and  found  in  the  conditions 
described  by  Mr.  Lacey  in  his  annual  report  for  1891,  in  which 
he  attributed  the  panic  of  1890  to  have  been  due  to  overtrading, 
unhealthful  expansion,  investments  in  speculative  securities  and 
in  various  forms  of  corporate  enterprises  and  development  in  new 
and  untried  fields,  and  in  undue  expansion  of  credits  by  the  banks. 

The  panic  of  1893  had  its  inception  in  the  financial  disturb- 
ance of  1890.  The  temporary  lull  in  that  storm  was  but  the 
harbinger  of  the  tempest  that  broke  over  the  country  with  cy- 
clonic ferocity  and  culminated  in  the  disastrous  panic  of  1893, 
which,  while  clarifying  the  atmosphere,  scattered  in  its  wake 
wreckage  that  required  years  to  remove. 

In  commenting  upon  the  causes  which  led  to  the  panic  of  1893, 
Mr.  Eckels,  in  his  annual  report  for  that  year,  prepared  only  a 
few  months  after  his  appointment  as  Comptroller,  stated  that — 

The  financial  situation  of  the  past  few  months  was 
not  the  result  of  either  a  lack  in  the  volume  of  currency, 
of  which  there  was  a  plethora,  or  a  want  of  elasticity  in 
the  system  of  issuing  it,  but  arose  from  a  loss  of  confi- 
dence on  the  part  of  the  people  in  the  solvency  of  the  dis- 
tinctively   monetary    institutions    of   the    country. 


198  ROMANCE  AND  TRAGEDY  OF  BANKING 

It  is  worthy  of  note  and  of  serious  consideration  that 
at  the  very  time  the  scarcity  of  currency  for  business 
purposes  was  at  its  height,  the  country's  volume 
of  currency  was  increasing  the  most  rapidly,  and  the 
amount  per  capita  was  much  larger  than  in  any  recent 
years.  Under  the  same  peculiar  condition  of  affairs  which 
marked  the  monetary  situation  from  May  to  September, 
no  system,  no  matter  how  elastic,  or  volume  of  currency 
however  large,  could  afford  relief.  So  long  as  confidence 
is  destroyed  and  credit  wanting,  money  hoarding  will  go  on 
and  additional  issues  but  add  to  the  hoardings  and  give 
but  little,  if  any,  actual  relief.  On  the  other  hand,  when 
confidence  and  credit  abound  there  exists  little  need  for  an 
abundant  circulating  medium,  because  under  such  a  condi- 
tion of  affairs  the  amount  of  actual  money  required  to 
transact  the  daily  business  affairs  of  life  is  reduced  to  a 
minimum. 

Strangely  in  contrast  are  these  views  with  the  financial  theory 
which  years  later  led  to  the  enactment  of  what  was  known  as 
"The  Emergency  Currency  Law,"  which  required  five  hundred 
millions  of  dollars  to  be  accumulated  in  the  Treasury  of  the 
United  States  for  the  purpose  of  preventing  or  arresting  panics 
such  as  was  experienced  in  1893. 

The  panic  of  1893  was  not  the  result  of  faulty  legislation. 
Neither  was  it  due  to  the  inelasticity  of  our  currency,  nor  to  an 
insufficiency  or  superabundance  of  its  volume.  It  had  its  origin, 
as  Mr.  Eckels  stated,  in  a  loss  of  confidence  in  the  solvency  of  the 
banks,  and  this  loss  of  confidence  was  inspired  by  a  general  knowl- 
edge of  the  unsound  conditions  in  private  and  in  public  life,  de- 
scribed by  Mr.  Lacey  in  his  report  for  1891,  and  the  speculative 
and  venturesome  character  of  the  investments  and  loans  in  which 
the  funds  of  many  of  the  banks  had  been  risked. 

The  five  hundred  millions  of  dollars  of  emergency  circulation 
held  in  reserve  in  the  Treasury  of  the  United  States,  if  promptly 
let  loose  at  the  opportune  time,  would  no  doubt  have  arrested  a 
panic,  as  was  demonstrated  in  later  years,  but  it  would  not  have 
prevented  one.  A  redundancy  of  circulation  for  immediate  use 
in  an  emergency  is  no  more  a  guaranty  against  a  financial  panic 
than  the  existence  of  an  effective  fire  department  is  an  insurance 


ROMANCE  AND  TRAGEDY  OF  BANKING  199 

against  fire.  If  promptly  put  in  operation,  they  may  ameliorate 
the  situation  or  check  the  conflagration,  but  neither  will  prevent 
the  outbreak.  Confidence  alone  in  the  stability  of  our  banking 
institutions  will  prevent  panics,  and  anything  that  tends  toward 
inspiring  confidence  in  the  soundness  of  our  banks  and  the  integ- 
rity and  conservatism  of  their  management  will  minimize  the  lia- 
bility to  panics  or  monetary  disturbances  of  any  kind. 

At  a  dinner  given  at  the  Union  League  Club  in  New  York  City 
on  the  evening  of  July  18,  1893,  Mr.  Eckels,  in  referring  to  the 
panic  of  that  year,  said: 

In  conservative  business  centers  the  failure's  have  been 
few,  either  in  banking  or  in  other  lines.  Pad  banking  at 
any  and  all  times  is  dangerous  and  must  inevitably  bring 
disaster  to  those  who  engage  in  it.  The  present  strengency 
has  simply  hastened  the  closing  of  some  banks  because  they 
were  inherently  weak.  Others  have  been  closed  as  a  re- 
sultant effect  of  having  kept  alive  the  operations  of  specu- 
lators in  the  extreme  west  and  in  portions  of  the  south. 
The  art  has  not  yet  been  discovered  of  making  something 
out  of  nothing,  and  the  financier  who  stakes  his  all  upon 
an  unbuilt  city  reaching  out  into  the  waste  places  of  the 
earth  must  bring  about  the  ruin  of  his  own  and  kindred 
institutions  which  have  trusted  in  him  and  pinned  their 
faith  in  assets  yet  unborn. 

The  simile  of  the  "unbuilt  city"  used  by  Mr.  Eckels  could  have 
been  applied  also  to  speculative  ventures  in  mining,  manufactur- 
ing and  various  other  developing  schemes  which  the  banks  during 
that  period  fostered  and  in  many  instances  their  officers  and  di- 
rectors were  interested  in  promoting. 

The  equipment  of  trunk  railway  lines  with  the  block  system 
and  other  safety  devices  against  accident  has  materially  increased 
the  security  of  the  traveler,  but  has  not  made  collisions  impos- 
sible. The  system  will  accomplish  its  purpose  if  the  men  who 
operate  the  machinery  faithfully  and  diligently  discharge  their 
duties,  and  the  engineer  who  runs  the  train  observes  and  heeds 
the  danger  signals  with  which  he  is  familiar.  But  when  one  neg- 
lects his  duty  by  failing  to  set  the  signals,  or  the  other  by  disre- 


200  ROMANCE  AND  TRAGEDY  OF  BANKING 

garding  them,  and  plunges  ahead  into  uncertainty,  disaster  is 
the  inevitable  result,  although  the  system  is  not  responsible. 

So,  too,  is  it  with  banking.  If  the  directors  of  banks  honestly 
and  faithfully  discharge  the  duties  that  devolve  upon  them  by 
law,  equip  their  banks  with  the  block  system  of  prudence  and 
conservatism  and  eliminate  all  hazardous  ventures  and  specula- 
tive risks,  the  security  of  the  depositor  will  be  augmented  in  the 
same  degree  that  the  safety  of  the  traveler  has  been  increased  by 
the  adoption  of  modern  safety  devices. 

Personal  equation  is  the  basis  of  confidence  in  banking,  and 
confidence  can  be  inspired  and  maintained  only  through  an  abso- 
lute reliance  upon  the  honesty,  conservatism  and  good  judgment 
of  the  men  who  direct  and  manage  our  financial  institutions. 

Most  Important  National  Bank  Failures  During  the  Panic 

of  1893 

The  two  largest  failures  of  national  banks  that  occurred  in 
1893  were  the  Columbia  National  and  Chemical  National  Banks 
of  Chicago,  111.  The  capital  stock  of  each  of  these  banks  was 
$1,000,000,  and  their  liabilities  were  $2,559,885  and  $2,910,745, 
respectively.  The  first-named  institution  was  the  parent  bank 
of  what  was  known  as  the  Zimri  Dwiggins  chain  of  banks,  or  the 
Dwiggins  System,  as  contra-distinguished  from  the  national 
banking  system. 

The  Dwiggins  theory  of  banking  seems  to  have  been  to  organ- 
ize a  bank  with  sufficient  capital  for  one  institution  and  to  estab- 
lish branches  at  different  points  with  no  apparent  connection  with 
each  other,  for  the  purpose  of  feeding  the  parent  institution  with 
deposits,  the  capital  of  the  latter  being  common  to  all,  and  the 
money  necessary  for  each  being  furnished  by  the  parent  bank 
as  needed. 

The  United  States  Loan  and  Trust  Company,  an  Indiana 
corporation,  with  an  office  in  Chicago,  was  an  adjunct  of  the 
Columbia  National  Bank  and  the  transactions  of  the  two  were 
so  closely  interwoven  that  they  were  practically  one  institution, 
and  Mr.  Dwiggins  was  the  whole  concern.  He  was  the  executive 
head  of  both  banks  and  appears  to  have  controlled  the  affairs  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  201 

each  without  consultation  with  the  directors  of  either.  As  presi- 
dent of  the  bank  he  appears  to  have  contracted  with  himself  as 
president  of  the  Trust  Company,  and  vice  versa,  and  did  not 
seem  to  think  it  necessary  to  leave  any  written  evidence  of  his 
dealings  between  the  two  corporations. 

The  original  purpose  for  which  the  Loan  and  Trust  Company 
was  organized  was  to  negotiate  farm  mortgages,  but  about  Feb- 
ruary, 1892,  the  company  was  reorganized  and  distributed  all 
of  the  assets  then  in  its  possession  among  its  stockholders.  The 
object  of  the  reorganized  institution  was  to  deal  in  the  stocks  of 
country  banks.  This  Trust  Company  appears  to  have  entered 
upon  its  existence  without  a  cent  of  paid-in  capital.  Whatever 
capital  the  stockholders  contributed  at  the  time  of  its  original 
organization  was  returned  to  them  at  the  time  of  its  reorganiza- 
tion. In  place  of  capital  stock  the  company  issued  $500,000  of 
what  were  designated  "income  bonds."  The  promoters  of  this 
enterprise  offered  these  bonds  to  anyone  who  was  foolish  enough 
to  buy  them.  The  purchaser  then  stood  in  the  position  of  a 
stockholder  of  the  Trust  Company,  his  bond  being  equivalent  to 
a  certificate  of  stock.  The  money  derived  from  the  sale  of  the 
income  bonds  was  to  be  invested  in  the  stocks  of  country  banks. 
The  plan  contemplated  further  that  when  $250,000  of  country 
bank  stock  was  accumulated  debenture  bonds  would  be  issued  in 
a  like  amount,  a  series  of  bonds  for  each  $250,000  of  stock. 
These  bonds  were  to  bear  interest  at  the  rate  of  five  per  cent,  per 
annum,  payable  from  the  dividends  declared  on  the  country  bank 
stock.  The  debenture  bonds  were  called  "collateral  trust  gold 
bonds."  It  was  expected  to  sell  these  bonds  at  par,  and  the 
holders  of  the  income  bonds,  when  the  collateral  trust  gold  bonds 
were  disposed  of,  would  have  in  the  treasury  an  amount  equal  to 
the  original  sum  they  invested  and  be  in  a  position  to  repeat  the 
process. 

Had  this  scheme  been  successful  the  United  States  Loan  and 
Trust  Company  would  have  finally  accumulated  the  stock  of  all 
the  country  banks  in  the  Dwiggins  chain,  and  when  the  last 
$250,000  of  stock  had  been  accumulated  and  the  collateral  trust 
gold  bonds  issued  thereon  and  sold,  the  original  purchasers  of 
the  income  bonds  would  have  had  returned  to  them  the  amount 


202  ROMANCE  AND  TRAGEDY  OF  BANKING 

they  originally  invested.  The  source  of  profit  to  the  holder  of 
income  bonds  was  the  country  bank  stock.  It  was  the  belief  that 
the  average  annual  dividends  on  this  stock  would  exceed  five  per 
cent. 

Seventy-five  per  cent,  of  whatever  surplus  was  accumulated 
over  and  above  five  per  cent,  was  to  inure  to  the  holders  of  the 
income  bonds  and  the  remaining  twenty-five  per  cent,  to  the 
holders  of  the  original  stock  of  the  United  States  Loan  and  Trust 
Company. 

Operated  honestly  this  banking  scheme  probably  might  have 
worked  successfully  and  profitably,  with  little  chance  for  the 
holders  of  the  income  bonds  to  lose  anything.  But  it  was  not  so 
conducted  by  the  Trust  Company.  Instead  of  selling  the  income 
bonds  for  cash  and  investing  the  proceeds  in  country  bank  stock, 
Dwiggins,  acting  for  the  Trust  Company,  would  call  the  stock- 
holders of  the  country  bank  together  and  arrange  to  trade  the 
income  bonds  for  the  bank  stock  at  par,  and  as  an  evidence  of 
good  faith  would  agree  to  deposit  with  the  bank  an  amount  of 
money  equal  to  the  value  of  the  stock  sought  to  be  purchased. 
After  consummating  the  trade  he  would  deposit  with  the  country 
bank  the  amount  agreed  upon  and  take  the  bank's  certificate  of 
deposit  therefor. 

Up  to  this  point  the  transaction  appeared  to  be  honest,  but 
just  at  this  stage  the  peculiar  financiering  of  Dwiggins  came 
into  play.  As  president  of  the  Loan  and  Trust  Company  he 
had  possession  of  the  country  bank  stock  and  the  certificate  of 
deposit  in  the  country  bank.  Then  as  president  of  the  Columbia 
National  Bank  he  would  purchase  from  himself  as  president  of 
the  Trust  Company  the  certificate  of  deposit  in  the  country  bank 
for  its  face  value,  taking  the  precaution  to  have  the  certificate 
indorsed  to  the  bank  without  recourse.  In  this  manner  the  Loan 
and  Trust  Company  would  succeed  in  disposing  of  its  income 
bonds  and  the  bank  would  relieve  the  company  of  the  burden  of 
its  contract.  As  president  of  the  Loan  and  Trust  Company  he 
would  also  make  an  absolute  or  conditional  sale  of  the  income 
bonds  to  a  country  bank  and  take  in  payment  therefor  a  certifi- 
cate of  deposit  from  the  bank  for  the  purchase  price.  Then  as 
president  of  the  Columbia  National  Bank  he  would  purchase  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  203 

certificate  of  deposit  from  himself  as  president  of  the  Trust  Com- 
pany at  its  face  value. 

With  a  nominal  investment  on  the  part  of  the  Trust  Company 
and  an  actual  investment  on  the  part  of  the  bank  of  from  two  to 
three  hundred  thousand  dollars,  Dwiggins,  between  the  date  of 
reorganization  of  the  Trust  Company  in  February,  1892,  and 
September  of  the  same  year,  succeeded  in  disposing  of  $250,000 
of  the  income  bonds  and  accumulated  $250,000  of  bank  stock, 
while  the  Columbia  National  Bank,  through  Dwiggins,  its  execu- 
tive head,  had  purchased  from  himself  as  president  of  the  Trust 
Company  at  least  $250,C00  of  certificates  of  deposits  in  country 
banks,  most  of  which  certificates  were  considered  worthless  at  the 
time  the  Columbia  National  Bank  failed. 

Dwiggins  apparently  was  more  interested  in  the  Loan  and 
Trust  Company  than  he  was  in  the  Columbia  National  Bank,  As 
a  net  result  of  his  numerous  transactions,  he  unloaded  upon  the 
bank  over  $241,000  of  the  collateral  trust  and  gold  bonds  and 
not  less  than  $250,000  of  certificates  of  deposit  in  the  country 
banks,  while  the  Trust  Company  succeeded,  without  any  invest- 
ment on  its  part,  in  getting  possession  of  $231,000  of  the  bank's 
discounts. 

The  transactions  of  Dwiggins  were  responsible  for  the  failure 
of  the  Columbia  National  Bank,  as  the  bank  appears  to  have  been 
used  simply  as  a  feeder  for  the  Trust  Company.  The  shareholders 
of  the  bank  were  assessed  $750,000  toward  paying  its  liabilities 
to  depositors  and  other  creditors,  but  $47,350  of  this  amount  was 
returned  to  them  in  cash,  the  assessment  having  been  excessive. 
This  is  explained  by  the  fact  that  the  one  hundred  per  cent, 
assessment  levied  by  the  Comptroller,  if  collected  in  full,  would 
have  been  more  than  sufficient  to  pay  the  deficiency  between  the 
amount  ralized  from  the  assets  and  the  liabilities  of  the  bank  to 
its  creditors.  Some  of  the  stockholders  paid  the  one  hundred  per 
cent,  in  full,  while  others  responded  in  part  only,  or  were  unable 
to  pay  anything.  The  law  provides  that  the  shareholders  of 
every  national  banking  association  shall  be  held  individually  re- 
sponsible, equally  and  ratably,  and  not  one  for  another,  for  all 
contracts,  debts  and  engagements  of  the  association  to  the  extent 
of  the  par  of  their  stock.     The  amount  returned  to  the  share- 


204  ROMANCE  AND  TRAGEDY  OF  BANKING 

holders,  therefore,  represented  the  excess  collected  from  those 
who  paid  one  hundred  per  cent,  over  and  above  the  ratable  amount 
for  which  they  were  liable. 

The  losses  on  assets  compounded  or  sold  under  order  of  the 
court  amounted  to  nearly  a  million  and  one-half  dollars.  The 
affairs  of  the  receivership  were  finally  closed,  September  30,  1905, 
after  the  payment  of  dividends  to  depositors  and  other  creditors 
of  eighty-one  per  cent. 

The  failure  of  this  bank  was  probably  the  most  disastrous 
of  any  of  the  national  bank  failures  that  occurred  during  the 
panic  of  1893.  Thirty  or  forty  small  banks  were  involved.  These 
banks  were  scattered  throughout  the  States  of  Illinois,  Indiana 
and  Michigan.  They  belonged  to  the  Dwiggins  chain,  and  all 
collapsed  with  the  failure  of  the  parent  institution. 

The  Chemical  National  Bank  of  Chicago 

The  Chemical  National  Bank  of  Chicago  was  organized 
December  15,  1891,  with  a  capital  stock  of  one  million  dollars. 
It  suspended  in  May,  1893,  but  was  not  placed  in  the  hands  of  a 
receiver  until  July  21  following,  its  affairs  in  the  meantime  hav- 
ing been  in  charge  of  a  national  bank  examiner. 

The  failure  of  this  institution  was  due  to  incompetent  and 
improper  management.  Apparently  the  bank  was  organized, 
and  had  been  freely  used  during  its  short  existence,  to  further 
the  interests  of  its  directors  and  some  of  the  larger  stockholders. 
Of  the  fifteen  directors  of  the  association  ten  were  either  them- 
selves directly  liable  to  the  bank  upon  their  personal  notes,  were 
indorsers  for  others,  or  were  interested  in  corporations  which 
owed  the  institution  an  amount  aggregating  at  least  $225,000, 
Seventy-one  of  the  shareholders,  owning  forty-seven  hundred  and 
seventy-two  shares  of  the  capital  stock,  owed  the  bank  nearly 
$700,000,  some  of  which  indebtedness  apparently  was  for  origi- 
nal stock  subscriptions.  The  general  character  of  the  securities 
held  for  loans  was  bad,  or  at  least  very  questionable,  and  some- 
thing like  $750,000  of  the  paper  held  was  of  doubtful  character, 
so  much  so  that  when  the  bank  applied  to  other  banks  for  re- 


ROMANCE  AND  TRAGEDY  OF  BANKING  205 

discounts  when  it  became  involved,  it  was  unable  to  obtain  assist- 
ance upon  the  security  offered. 

In  the  liquidation  of  the  bank  under  the  receivership  an  assess- 
ment of  $100,000,  or  ten  per  cent,,  was  levied  upon  the  stock- 
holders, of  which  amount  only  $63,644  was  collected.  The  total 
collections  from  all  sources  amounted  to  $1,712,489,  and  divi- 
dends amounting  to  93.40  per  cent.,  or  $1,424,484,  were  paid,  and 
the  receivership  was  finally  closed  May  2,  1900. 

Under  a  special  Act  of  Congress,  approved  May  12,  1892, 
any  national  bank  in  the  city  of  Chicago  was  authorized  to  estab- 
lish and  operate  a  branch  bank  on  the  grounds  of  the  Columbian 
Exposition,  for  a  period  of  not  exceeding  two  years,  beginning 
not  earlier  than  July  1,  1892,  and  closing  not  later  than  July  1, 
1894. 

Under  authority  of  this  Act  the  Chemical  National  Bank 
established  an  office  at  Jackson  Park  on  the  Exposition  grounds, 
but  as  the  Exposition  was  not  formally  opened  until  May  1,  1893, 
the  branch  office  hardly  commenced  business  before  the  parent 
institution  failed,  which  necessitated  the  closing  of  the  branch. 

This  branch  office  received  the  deposits  of  the  Exposition 
Company  as  well  as  those  of  exhibitors  and  others.  At  the  time 
of  the  failure  of  the  Chemical  National  Bank  and  the  closing  of 
the  branch  office,  a  large  amount  of  deposits  had  been  received  by 
the  latter  institution.  The  Board  of  Directors  of  the  Exposition 
paid  the  deposits  of  the  exhibitors  and  made  arrangements  with 
the  Northern  Trust  Company  to  do  the  banking  business  at  the 
Park. 

The  authorization  of  the  establishment  of  this  branch  on  the 
grounds  of  the  World's  Columbian  Exposition  and  a  similar  auth- 
ority authorizing  any  bank  or  trust  company  located  in  the  State 
of  Missouri  to  conduct  a  banking  office  on  the  grounds  of  the 
Louisiana  Exposition  at  St.  Louis,  approved  March  3,  1901,  are 
the  only  instances  of  the  authorization  by  Congress  of  the  privi- 
lege of  establishing  and  operating  a  branch  office  in  the  United 
States  by  a  national  bank  of  primary  organization.  While  the 
National  Bank  Act  does  not  specifically  prohibit  the  operations 
of  branch  banks,  the  implication  to  that  effect  is  clear,  and  it 
always  has  been  held  that  what  is  not  specifically  authorized  by 


206  ROMANCE  AND  TRAGEDY  OF  BANKING 

the  Act  is  prohibited.  National  banks,  therefore,  are  permitted 
to  have  but  one  banking  house  or  office,  at  which  the  ordinary 
business  of  discount  and  deposit  must  be  conducted,  and  the 
United  States  District  Courts  have  held  that  they  cannot  lawfully 
receive  deposits,  cash  checks  or  do  any  of  the  ordinary  business 
of  the  bank  elsewhere.^ 

Bank  failures  continued  throughout  the  remaining  years  of 
Mr.  Eckels'  administration  to  a  much  greater  extent  than  the 
yearly  average  number  during  the  preceding  periods.  From 
April  14,  1865,  the  date  of  the  first  national  bank  failure,  to 
December  31,  1897,  the  date  of  Mr.  Eckels'  retirement  from 
office,  three  hundred  and  sixty-nine  national  banks  were  placed 
in  the  hands  of  receivers.  Between  April  26,  1893,  and  Decem- 
ber 31,  1897,  the  period  covered  by  Mr.  Eckels'  term  as  Comp- 
troller, two  hundred  and  eighty  national  banks  suspended,  one 
hundred  and  eighty-one  of  which  were  placed  in  the  hands  of 
receivers,  or  forty-nine  per  cent,  of  the  total  number  of  receiver- 
ships from  the  beginning  of  the  national  banking  system. 

The  general  stagnation  in  business  throughout  the  entire 
country  which  followed  the  panic  of  1893  and  continued  for  sev- 
eral years,  largely  augmented  the  difficulties  attending  the  liqui- 
dation of  the  affairs  of  the  numerous  receiverships  resulting  from 
the  panic,  and  greatly  increased  the  labors  of  the  Currency 
Bureau.  Settlement  of  the  numerous  complications  arising  from 
these  failures  and  the  litigation  over  disputed  claims,  constituted 
the  principal  work  of  the  remaining  years  of  Mr.  Eckels'  term. 
Confidence  in  the  banks  and  the  banking  situation,  however,  was 
soon  restored.  Deposits,  which  declined  from  $1,764,456,177  on 
December  9,  1892,  to  $1,451,124,330,  had  again  increased  to 
$1,728,418,819  by  October  2,  1894,  or  within  about  $36,000,000 
of  the  highest  figure  attained  in  1892.  Owing  to  the  business 
depression,  there  was  a  decided  check  upon  the  organization  of 
new  national  associations.     During  the  year  following  the  panic 


'This  paragraph  was  written  before  Mr.  Crissing-er  assumed  charge 
of  the  bureau  and  ruled,  in  substance,  that  while  branch  banks  were  not 
authorized  by  law  it  is  permissible  for  a  national  bank  to  have  one  or 
more  agencies  in  the  same  city  or  town  in  which  it  is  located,  with  the 
approval  of  the  Comptroller. 


ROMANCE  AND  TRAGEDY  OF  BANKING  207 

only  fifty  national  banks  were  organized,  with  an  aggregate  capi- 
tal of  $5,285,000,  or  an  average  capital  of  $105,700  each.     This 
was  the  smallest  number  of  new  oi-ganizations  and  the  minimum 
amount  of  capital  authorized  in  any  year  since  1879.     The  net 
earnings  of  the  banks  were  also  the  lowest  recorded  in  the  history 
of  the  system,  with  the  exception  of  those  for  the  years  1878  and 
1879.    The  average  dividends  paid  were  only  five  per  cent.    Many 
banks  were  compelled  to  go  into  voluntary  liquidation  or  reduce 
their  capital  stock  in  proportion  to  their  deposits  and  to  provide 
for  losses  which  impaired  their  capital,  in  lieu  of  an  assessment 
.  upon  the  stockholders  to  make  good  the  deficiency.     The  unpar- 
alleled severity  of  the  panic  caused  an  appalling  shrinkage  in 
values  of  nearly  every  kind  and  character.     The  depreciation  of 
securities  usually  dealt  in  on  stock  exchanges  was  so  great  as  to 
make   them   unmarketable.      Commercial   houses,   manufacturing 
establishments,  railroads  and  factories,  all  were  affected  alike  by 
the  depression  and  numerous  business  failures  and  enforced  idle- 
ness was  the  result.    The  return  of  deposits  to  the  banks  had  the 
effect  of  accumulating  large  amounts  of  money  at  the  principal 
financial  centers  and  cash  reserves  were  piled  up  with  compara- 
tively little  expansion  of  loans.    Out  of  a  list  of  two  hundred  and 
twenty-seven  securities  dealt  in  on  the  New  York  Stock  Exchange 
only  nine  showed  an  advance  during  the  year,  and  a  conservative 
estimate  of  the  shrinkage  in  value  of  twenty-five  speculative  stocks 
amounted  to  $235,000,000.     The  mercantile  and  bank  failures 
during    the    year    were    estimated    to    number    about    seventeen 
thousand. 

Under  such  a  condition  of  affairs,  the  difficulties  attending  the 
liquidation  of  failed  banks  can  readily  be  imagined.  Notwith- 
standing this  fact,  Mr.  Eckels  devoted  his  energies  during  the 
remainder  of  his  term  to  the  liquidation  of  the  failed  institutions 
as  expeditiously  as  possible  consistent  with  the  best  interests  of 
the  trusts,  and  at  the  close  of  his  term  thirty-two  out  of  the  one 
hundred  and  eighty-one  banks  that  were  placed  in  the  hands  of 
receivers  during  his  administration  were  finally  closed,  and  a  con- 
siderable number  of  the  remainder  had  paid  several  dividends 
each  to  their  depositors.  The  dividends  paid  in  1893  amounted 
to  the  sum  of  $3,433,646;  in  1894  to  $5,124,577;  in  1895  to 


208  ROMANCE  AND  TRAGEDY  OF  BANKING 

$3,380,552;  in  1896  to  $2,451,959,  and  in  1897  to  $13,169,781, 
making  a  total  of  dividends  paid  within  the  five  years  from  1893 
to  1897  of  $27,560,515,  or  thirty-six  and  a  quarter  per  cent,  of 
all  the  dividends  paid  to  creditors  of  insolvent  national  banks 
from  1863  to  1897. 

During  the  thirty-four  years  covered  by  the  period  indicated, 
a  total  of  $75,935,925  had  been  paid  in  dividends  to  creditors  of 
the  three  hundred  and  sixty-eight  banks  that  had  been  placed  in 
the  hands  of  receivers,  and  $13,169,781,  or  seventeen  and  one- 
third  per  cent,  of  this  amount,  was  paid  in  1897,  the  last  year  of 
Mr.  Eckels'  term.  Seventeen  additional  dividends  were  ordered, 
amounting  to  $625,000,  but  had  not  been  paid  at  the  close  of  the 
Comptroller's  report  year  of  October  31,  1897. 

The  National  Bank  of  Kansas  City,  Mo. 

The  National  Bank  of  Kansas  City,  Mo.,  was  organized  April 
13,  1886,  with  a  capital  stock  of  $1,000,000.  It  suspended  tem- 
porarily during  the  panic  of  1893,  but  resumed  business  Octo- 
ber 9  of  that  year,  after  the  payment  of  an  assessment  upon  the 
stockholders  of  thirty  per  cent,  and  entering  into  an  agreement 
with  its  creditors  for  an  extension  of  their  claims  for  periods 
ranging  from  three  to  twelve  months.  About  ninety  per  cent,  of 
the  claims  of  depositors  and  other  creditors  were  extended  under 
this  agreement. 

After  the  bank  resumed  business,  a  large  number  of  the  depos- 
itors being  in  need  of  money,  borrowed  from  other  banks  by  hy- 
pothecating their  extension  certificates  as  security  for  their  loans. 
These  certificates  were  presented  promptly  for  payment  at  the 
date  of  maturity  by  the  banks  holding  them,  and  the  National 
Bank  of  Kansas  City  was  obliged  to  pay  them  on  demand,  as  no 
further  negotiations  could  be  effected  with  the  depositors  who 
transferred  their  claims.  This  condition  created  a  constant 
demand  upon  the  cash  resources  of  the  bank  from  the  date  of  the 
first  maturity  of  these  certificates  up  to  near  the  time  of  the  sec- 
ond closing  of  the  bank. 

While  the  bank  at  the  date  of  resumption  of  business  appeared 
to  have  ample  cash  resources  to  meet  all  demands  that  were  likely 


ROMANCE  AND  TRAGEDY  OF  BANKING  209 

to  be  made,  the  managers  did  not  anticipate  the  hypothecation  of 
such  a  large  amount  of  the  extension  certificates  and  the  demand 
for  their  payment  as  they  matured.     These  demands   soon  ab- 
sorbed all  of  the  available  cash  of  the  bank,  and  while  collections 
were  made  from  the  assets  to  a  certain  degree,  they  did  not  keep 
pace  with  the  constant  shrinkage  in  deposits.    In  addition  to  this, 
the  continued  business  depression  throughout  that  section  of  the 
country  operated  to  further  reduce  individual  balances,  the  de- 
positors being  unable  to  maintain  their  deposits,  as  they  would 
no  doubt  have  done  under  more  favorable  or  normal  business  and 
financial  conditions.     The  withdrawal  of  deposits  did  not  seem  to 
be  so  much  from  want  of  confidence  in  the  management  of  the 
bank  as  from  the  necessities  of  the  depositors,  and  the  holders  of 
the  extension  certificates  could  not,  of  course,  be  expected  to  per- 
mit the  deposits  to  remain  in  the  bank,  but  demanded  payment  at 
maturity. 

In  the  course  of  twelve  or  fifteen  months  it  became  apparent 
that  the  bank  was  not  gaining  in  resources,  but  on  the  contrary 
its  cash  availables  were  being  constantly  reduced.  This  fact  was 
noticed  by  the  depositors  and  the  business  public  and  naturally 
excited  remark  and  distrust,  which  had  the  effect  of  causing  quiet 
but  steady  withdrawals  of  balances.  The  last  published  state- 
ment of  the  bank  *made  such  an  unfavorable  showing  in  this 
respect  as  to  produce  a  slight  run,  which  resulted  in  the  with- 
drawal during  the  one  week  immediately  previous  to  suspension 
of  $126,000. 

The  bank  also  had  a  large  amount  of  paper  based  upon  real 
estate  security,  the  greater  part  of  which,  while  ultimately  good, 
was  not  immediately  convertible. 

When  this  condition  of  affairs  became  known  to  the  examiner 
he  made  an  examination  of  the  bank  and  satisfied  himself  that 
unless  some  assistance  was  received  from  the  Clearing  House  Asso- 
ciation suspension  was  inevitable.  Negotiations  were  under  way 
at  this  time  to  sell  the  institution  to  one  of  the  other  banks  in 
Kansas  City,  but  nothing  was  accomplished  in  that  direction,  and 
when  efforts  to  obtain  assistance  from  the  Clearing  House  Asso- 
ciation failed,  the  examiner  concluded  that  the  interests  of  the 
depositors  and  the  public  would  be  best  subserved  by  closing  and 


210  ROMANCE  AND  TRAGEDY  OF  BANKING 

taking  possession  of  the  association.  This  course  was  justified 
by  subsequent  discoveries.  Upon  taking  possesion  of  the  institu- 
tion the  examiner  found  in  the  bank's  mail  a  demand  from  a  cor- 
respondent bank  for  the  immediate  remittance  of  $30,000  in  cash, 
and  in  addition,  the  bank  was  found  to  be  a  debtor  to  the  Clear- 
ing House  Association  in  the  sum  of  $25,000,  demand  for  which 
would  have  been  made  had  the  bank  opened  for  business  on  Mon- 
day morning. 

The  failure  of  this  institution  was  due  principally  to  a  depre- 
ciation of  securities  and  the  general  stagnation  in  business  that 
prevailed  at  that  time.  The  total  assets  of  the  association  at  the 
time  of  failure  amounted  to  $2,449,033.  An  assessment  was  levied 
upon  the  stockholders  by  the  Comptroller  to  pay  the  claims  of 
creditors,  but  only  $196,535  of  the  $230,000  assessed  was  col- 
lected, while  the  total  collections  from  all  sources  amounted  to 
only  $1,400,874,  Several  dividends,  aggregating  78.54  per  cent., 
or  $947,455,  were  paid  depositors  and  other  creditors,  and  the 
trust  was  finally  closed  July  1,  1908. 

Failure  of  the  National  Bank  of  Illinois 

The  National  Bank  of  Illinois  at  Chicago  was  organized 
August  29,  1871,  and  was  placed  in  the  hands  of  a  receiver 
December  21,  1896,  after  having  passed  successfully  through  the 
great  Chicago  fire  and  the  financial  panics  of  1873,  1877  and 
1893.  In  volume  of  assets  and  liabilities  this  failure  was  the  larg- 
est at  that  time  of  any  in  the  history  of  the  national  banking 
system. 

The  suspension  of  this  institution  was  due  to  recklessness, 
speculative  and  dishonest  methods  in  banking,  and  inattention  on 
the  part  of  the  directors  to  the  bank's  affairs.  At  the  date  of 
failure  of  this  association  it  had  an  authorized  capital  of 
.$1 ,000,000,  a  reported  surplus  of  the  same  amount,  and  undivided 
profits  of  $315,212.  The  total  assets  of  the  bank  aggregated 
nearly  $22,000,000,  and  the  liabilities  to  depositors  and  other 
creditors,  exclusive  of  stockholders,  exceeded  $12,0C0,000. 

The  president  of  this  association  was  one  of  Chicago's  leading 
German  citizens.     He  was  connected  with  many  social,  political 


ROMANCE  AND  TRAGEDY  OF  BANKING  211 

and  business  societies  and  organizations  and  through  such  con- 
nection secured  for  the  bank  many  deposits  of  city  and  county 
funds  and  of  clubs  and  society  organizations. 

The  principal  cause  of  failure  of  the  bank  was  the  large  and 
unlawful  loans  to  the  Columet  Electric  Street  Railway,  which 
aggregated  nearly  $2,500,000,  and  in  addition  thereto  about 
$500,000  to  sundry  contractors  interested  in  elevated  railroad 
building.  A  large  amount  of  the  loans  to  the  Calumet  Electric 
Company  did  not  appear  on  the  books  of  the  bank  as  the  liabilities 
of  this  concern,  but  were  concealed  in  other  accounts  for  the  pur- 
pose of  deceiving  the  bank  examiner  and  the  Comptroller. 

This  electric  railroad  had  a  short  time  previously  made  im- 
portant extensions  and  development  of  its  line.  The  company 
had  about  seventy-five  miles  of  road  running  through  a  territory 
which  at  that  time  was  sparsely  settled  and  only  beginning  to 
develop,  and  the  earnings  of  the  company  were  naturally  insuf- 
ficient to  pay  its  operating  expenses.  The  company  needed  financ- 
ing and  the  bank  furnished  the  funds.  Its  outstanding  bonds 
amounted  to  about  $2,500,000,  and  these  were  made  the  basis  of 
the  loans  by  the  bank. 

When  the  bank  was  found  by  the  examiner  to  be  in  a  precari- 
ous condition  the  Clearing  House  Association  of  Chicago  was 
appealed  to  for  assistance,  but  after  a  searching  investigation 
by  a  committee  of  that  association,  instead  of  coming  to  the  relief 
of  the  bank,  adopted  a  resolution  suspending  the  bank  from 
Clearing  House  privileges,  because  of  the  large  unwarrantable 
and  injudicious  loans  made  to  the  Calumet  Company  and  others, 
which,  it  was  publicly  announced  by  the  committee,  seriously 
impaired,  if  it  did  not  entirely  absorb,  the  capital  and  surplus 
of  the  bank.  The  committee,  however,  expressed  the  opinion  that 
the  assets  of  the  bank  were  considered  ample  collateral  for  loans 
at  seventy-five  per  centum  of  their  face  value,  and  in  order  to 
afford  depositors  speedy  relief  the  Clearing  House  banks  agreed 
to  advance  that  amount  upon  all  claims  of  creditors  of  the  asso- 
ciation approved  by  the  receiver. 

Considerable  surprise  was  expressed  at  the  time  that  the 
Clearing  House  Committee  should  have  let  the  bank  suspend 
rather  than  assist  it  to  liquidate,  but  the  committee  found  the 


212  ROMANCE  AND  TRAGEDY  OF  BANKING 

condition  of  affairs  to  be  such  that  heroic  action  was  deemed 
necessary. 

After  the  suspension  of  the  bank  it  was  found  that  the  funds 
of  the  association  had  been  freely  used  for  years  to  bolster  up 
the  far-reaching  speculations  of  the  second  vice-president,  who 
was  its  chief  executive  officer.  It  was  charged  that  he  was  princi- 
pally instrumental  in  wrecking  the  institution.  He  commenced 
his  career  in  the  bank  at  the  time  of  its  organization  in  the  capac- 
ity of  a  clerk.  He  gradually  rose  from  this  position  to  that  of 
teller,  later  became  cashier,  and  finally  second  vice-president  and 
chief  executive  officer  and  the  master  mind  of  the  institution.  He 
had  the  reputation  of  being  industrious,  shrewd,  careful,  and  of 
good  business  judgment,  saved  his  earnings  and  invested  them 
wisely.  He  then  appears  to  have  spread  out  in  speculative  invest- 
ments, promotion  schemes  in  mining  and  railroads,  and  various 
other  enterprises  that  required  large  capital.  The  president  of 
the  bank  had  grown  old  and  could  no  longer  give  the  affairs  of 
the  institution  the  attention  that  he  gave  them  in  his  younger 
days.  In  consequence  the  active  control  passed  into  the  hands 
of  the  vice-president,  which  gave  him  an  opportunity  to  carry  out 
his  schemes  with  no  one  to  interfere  with  him,  except  the  directors, 
who  apparently  left  the  sole  management  in  his  charge.  After 
staking  his  private  fortune  in  his  investments,  and  additional 
capital  being  required,  the  funds  of  the  bank  were  used  to  further 
his  ventures,  and,  to  conceal  his  unlawful  loans,  false  entries  in 
the  books  were  resorted  to.  The  bank  did  a  large  foreign  ex- 
change business,  and  this  account  was  manipulated  to  cover  over- 
drafts and  conceal  from  the  board  of  directors  and  the  examiner 
the  magnitude  of  the  principal  loans.  So  completely  were  the 
books  of  the  bank  and  its  published  statements  juggled  that  the 
receiver  was  compelled  to  go  back  to  the  beginning  of  every  large 
account  and  trace  down  each  item  in  order  to  arrive  at  a  correct 
understanding  of  the  amount  of  the  liability. 

On  January  1,  1897,  this  vice-president  disappeared  in  the 
dead  of  night  from  his  home  in  Evanston,  111.,  and  at  noon  on  the 
following  day  his  lifeless  body  was  discovered  floating  in  the  lake 
near  Evanston.     He  was  driven  to  suicide  by  the  responsibility 


ROMANCE  AND  TRAGEDY  OF  BANKING  213 

resting  upon  him  for  having  wrecked  the  bank  and  the  fear  of 
criminal  prosecution. 

In  the  liquidation  of  the  trust  the  losses  on  assets  compounded 
or  sold  by  the  receiver  under  order  of  the  court,  amounted  to 
$7,132,812.  An  assessment  of  100  per  cent.,  or  $1,000,000,  was 
levied  by  the  Comptroller  upon  the  shareholders,  of  which  amount 
$848,508  was  collected,  while  the  collections  from  all  sources 
aggregated  $14,233,221.  Dividends  amounting  to  100  per  cent, 
of  the  proved  claims,  or  $11,932,745,  were  paid,  with  interest  of 
16.30  per  cent.  The  Columet  Electric  Railway  was  sold  early  in 
1906,  for  the  sum  of  $3,150,000,  including  the  remaining  assets 
of  the  bank,  and  the  receivership  was'  finally  closed  September  30, 
1906. 

Amendments  to  the  Law  Recommended 

Many  amendments  to  the  banking  laws  were  recommended  by 
Mr.  Eckels  in  his  five  annual  reports  to  Congress,  some  of  which 
have  since  been  adopted.  Such  as  have  not  been  enacted  into  law 
are  the  following : 

1.  That  the  Comptroller,  with  the  approval  of  the  Secretary 
of  the  Treasury,  be  empowered  to  remove  officers  and  directors 
of  a  bank  for  violations  of  law,  after  due  hearing. 

2.  For  the  appointment  of  two  supervisory  examiners  at  Gov- 
ernment expense,  to  assist  and  supervise  the  examiners  in  the  field 
and  secure  uniformity  and  greater  efficiency  in  their  work. 

3.  That  upon  one  day  in  each  year,  to  be  designated  by  the 
Comptroller,  the  directors  of  every  national  bank  be  required  to 
make  a  special  examination  of  its  affairs  and  submit  to  the  Comp- 
troller a  report  of  such  examination  upon  blanks  furnished  by 
him  for  that  purpose. 

In  support  of  this  last  recommendation,  Mr.  Eckels  expressed 
the  belief  that  such  an  examination  would  lead  to  better  banking 
methods,  greater  carefulness  in  making  loans,  and  less  liability 
of  concealment  of  long-continued  dishonesty  on  the  part  of  officers 
and  employees. 

In  order  to  guarantee  the  note-holder  against  loss  on  circu- 
lation of  an  insolvent  bank,  he  suggested  the  creation  of  a  safety 


214  ROMANCE  AND  TRAGEDY  OF  BANKING 

fund  to  be  provided  by  a  graduated  tax  of  not  less  than  five  per 
cent,  of  the  total  outstanding  circulation. 

In  his  annual  report  for  1894,  Mr.  Eckels  presents  his  views 
at  length  in  regard  to  the  necessity  for  a  change  from  a  bond  to  a 
safety  fund  security  as  a  basis  for  national  bank  circulation,  as 
the  only  means  of  injecting  elasticity  into  such  issues. 

He  did  not  in  his  reports  undertake  to  outline  the  details  of 
any  plan  for  effecting  a  change  in  the  basis  of  security  for  bank- 
note issues  and  redemptions,  but  suggested  the  appointment  of  a 
non-partisan  commission,  composed  of  men  of  eminent  ability  to 
carefully  investigate  and  study  the  whole  subject  and  devise  a 
currency  system  which  would  commend  itself  to  every  business 
interest  of  the  country. 

In  later  years,  by  authority  of  Congress,  the  National  Mone- 
tary Commission  was  appointed,  which  collected  and  collated  in- 
formation and  statistics  relating  to  banking  and  currency  from 
every  quarter-of  the  globe,  regardless  of  time,  labor  or  expense. 
This  feature  of  Mr.  Eckels'  recommendation  was  fully  and  exhaus- 
tively carried  out,  but  the  activities  of  the  commission  did  not 
result  in  the  fulfillment  of  his  dream,  as  expressed  in  his  recom- 
mendation, that  such  a  commission  could  unquestionably  "devise 
a  currency  system  sound  in  every  part  and  one  which  would  com- 
mend itself  to  every  business  interest  of  the  country."  The  vast 
amount  of  valuable  information  collected  and  prepared  by  the 
National  Monetary  Commission  was  of  great  aid  and  value  to  the 
f  ramers  of  the  Federal  Reserve  Act  and  was  largely  used  by  them 
as  the  basis  of  that  legislation. 


CHARLES  G.  DAWES 
Comptroller  of  the  Currency,  1 898-1 901 


CHAPTER  XII 

Charles  G.  Dawes 

CHARLES  G.  DAWES,  of  Illinois,  the  tenth  Comptroller  of 
the  Currency,  was  appointed  to  succeed  Mr.  Eckels  Janu- 
ary 1,  1898,  and  continued  in  office  until  September  30, 
1901. 

Mr.  Dawes  was  born  at  Marietta,  Ohio,  August  27,  1865.  He 
attended  the  public  schools  of  his  native  city  and  was  graduated 
at  Marietta  College  with  honors  in  1884.  He  was  only  thirty- 
three  years  of  age  at  the  time  of  his  appointment  as  Comptroller, 
and,  like  his  immediate  predecessor,  never  had  had  any  banking 
experience,  although  he  was  a  student  of  finance  and  in  1884 
wrote  and  published  a  book  entitled  "The  Banking  System  of  the 
United  States."  His  appointment  as  Comptroller  and  his  suc- 
cessful administration  of  the  office  was  a  further  demonstration 
of  the  fact  that  a  man  of  good  business  judgment  and  discretion 
is  as  well  qualified  and  capable  of  filling  the  position  satisfactorily 
as  a  trained  banker. 

After  leaving  college,  he  attended  the  Cincinnati  Law  School, 
from  which  he  was  graduated  in  1886.  After  graduation  he  was 
engaged  for  a  time  in  civil  engineering  and  became  Chief  Engineer 
of  a  railroad  which  now  constitutes  a  portion  of  the  Toledo  and 
Ohio  Line. 

In  1887  he  removed  from  Marietta,  Ohio,  to  Lincoln,  Neb., 
where  for  seven  years  he  practiced  law  and  successfully  engaged 
in  business  under  the  firm  name  of  Dawes,  Cunningham  &  Coff- 
roth.  While  living  in  Nebraska  he  took  an  active  part  in  public 
affairs,  and  about  the  time  of  the  enactment  of  the  Interstate 
Commerce  Law  was  a  recognized  leader  in  the  discussions  of  the 
freight  rate  schedules  of  Nebraska. 

Mr.  Dawes  was  a  very  close  friend  of  President  McKinley, 
socially  and  politically,  and  was  the  executive  head  of  the  Mc- 
Kinley movement  which  resulted  in  the  Illinois  delegation  being 
instructed  for  McKinley  at  the  Springfield  Convention  in  1896. 

21B 


216        iio:mance  and  tragedy  of  banking 

He  was  the  representative  from  Illinois  on  the  Executive  Com- 
mittee of  the  Republican  National  Committee  in  the  campaign 
of  that  year,  and  took  an  active  part  in  the  election  of  Mr,  Mc- 
Kinley  to  the  Presidency. 

After  several  3'ears'  residence  in  Nebraska,  Mr.  Dawes  re- 
turned to  Illinois  and  became  interested  in  the  gas  business  at 
Evanston,  where  he  has  since  resided,  with  the  exception  of  the 
time  that  he  lived  in  Washington.  He  resigned  the  office  of  Comp- 
troller on  September  30,  1901,  for  the  purpose  of  making  an 
active  canvass  for  the  position  of  United  States  Senator  from 
Illinois,  but  the  untimely  death  of  President  McKinley  interfered 
with  his  plans  in  this  respect  and  led  to  the  abandonment  of  his 
aspirations  in  that  direction. 

In  1892  he  organized  the  Central  Trust  Company  of  Illinois 
at  Chicago,  of  which  he  was  its  first  president.  This  company 
started  with  a  capital  stock  of  $2,000,000,  which  was  subse- 
quently increased  by  the  absorption  of  other  banking  institutions 
to  $4,500,000,  with  surplus  and  profits  of  nearly  $2,000,000, 
and  deposits  of  all  kinds  of  over  $43,000,000.  It  has  been  a  very 
successful  banking  institution  from  the  time  it  commented 
business. 

When  the  United  States  became  involved  in  the  World  War 
with  Germany,  Mr.  Dawes  promptly  volunteered  his  services  and 
was  commissioned  a  lieutenant-colonel  of  engineers,  leaving  imme- 
diately' for  France  to  join  the  forces  of  General  Pershing.  He 
was  shortly  thereafter  promoted  to  the  rank  of  brigadier-general 
of  engineers  and  was  made  Chief  of  the  United  States  Purchasing 
Board  in  charge  of  the  procurement  of  supplies  for  the  American 
Army  in  Europe  and  a  representative  of  the  American  Army  on 
the  Military  Co-ordinating  Board  for  supply  activities  of  the 
Allied  Armies.  He  rendered  invaluable  services  to  his  country 
and  to  the  allied  armies  in  this  connection,  in  recognition  of  which 
the  French  War  Cross  was  personall}'  conferred  upon  him  by 
General  Foch. 

When  the  Act  of  June  10,  1922,  was  approved,  providing  for 
a  budget  and  an  independent  audit  of  Government  accounts.  Pres- 
ident Harding  selected  Mr.  Dawes  to  inaugurate  the  budget  sys- 
tem and  appointed  him  "Director  of  the  Bureau  of  the  Budget". 


ROMANCE  AND  TRAGEDY  OF  BANKING  217 

Mr.  Dawes  assumed  office  on  June  23,  1921,  and  under  his 
immediate  and  energetic  supervision  the  new  bureau  was  estab- 
lished and  the  system  successfully  and  promptly  put  into 
operation. 

After  establishing  the  bureau  on  a  proper  basis  and  placing 
everything  in  satisfactory  working  order,  Mr.  Dawes  resigned  and 
on  July  1,  1922,  returned  to  Chicago  to  resume  the  banking  busi- 
ness in  which  he  was  engaged  at  the  time  he  entered  the  military 
service  of  the  Government  for  the  war  in  Europe. 

Mr.  Dawes  is  the  son  of  General  Rufus  R.  Dawes,  of  Marietta, 
Ohio,  a  veteran  of  the  Civil  War,  and  one  of  the  commanders  of 
the  famous  old  Iron  Brigade  of  Wisconsin.  At  one  time  he  served 
as  a  Representative  in  Congress  from  Ohio. 

Charles  G.  Dawes  inherited  great  regard  for  old  soldiers 
and  no  man  in  public  life  in  Washington  had  a  greater  respect 
for  an  old  veteran  of  the  Civil  War  or  was  ever  more  ready  to 
extend  to  him  sympathy  and  a  helping  hand  than  Charles  G. 
Dawes. 

This  fact  brings  to  mind  an  incident  in  the  lives  of  two  old 
veterans  who  were  employed  as  messengers  in  the  Currency 
Bureau  while  Mr.  Dawes  was  Comptroller.  One  had  served  in 
the  Union  Army  and  the  other  in  the  Confederate  service.  On 
one  occasion  during  the  Civil  War  a  dance  was  being  held  in  a 
house  in  Virginia  near  where  a  force  of  Union  soldiers  were  en- 
camped. Information  was  received  at  the  Union  camp  that  a 
number  of  Confederate  soldiers  were  attending  this  dance  and  a 
non-commissioned  officer  with  a  squad  of  men  was  detailed  to  cap- 
ture them.  They  proceeded  to  the  place,  surrounded  the  house 
and  demanded  the  surrender  of  the  soldiers  present.  One  of  them 
was  one  of  the  messengers  referred  to,  who  attempted  to  escape 
by  way  of  a  window  on  the  second  floor,  but  was  captured  by  the 
other  messenger,  who  was  in  command  of  the  squad,  and  marched 
to  camp  as  a  prisoner.  After  separating  they  did  not  meet  again 
until  chance  brought  them  together  in  the  civil  service  of  the 
Government  as  employees  of  the  Comptroller's  office.  In  discuss- 
ing the  incidents  of  the  war  with  each  other,  the  ex-Confederate 
related  the  story  of  his  capture  at  the  dance  and  then  learned  for 
the  first  time  that  his  fellow-messenger  was  his  captor.     These 


218  ROMANCE  AND  TRAGEDY  OF  BANKING 

two  men  became  fast  friends  from  that  time  and  any  day  they 
could  be  seen  during  the  lunch  hour  smoking  their  pipes  of  peace 
and  relating  incidents  and  their  experiences  during  war  days. 
Both  have  passed  away  and  have  joined  the  great  army  of  their 
comrades  who  preceded  them,  having  died  within  a  few  months  of 
each  other.  One  of  them  was  absolutely  worthless  and  unreliable, 
and  several  attempts  were  made  to  have  him  transferred  out  of 
the  bureau,  but  Mr.  Dawes  would  not  permit  this  to  be  done  while 
he  was  Comptroller. 

A  similar  instance  may  be  related  of  another  old  veteran  of 
the  Civil  War  who  was  employed  as  a  messenger  in  the  Currency 
Bureau  when  Mr.  Dawes  was  Comptroller.  He  had  been  a  brave 
soldier  and  bore  the  evidence  of  several  wounds  received  in  battle. 

This  man  was  a  college  graduate,  highly  educated,  and  a  law- 
yer. He  had  seen  better  days,  and  at  one  time  represented  the 
United  States  Government  in  an  important  consular  position 
abroad.  He  was  a  good  conversationalist,  well  informed,  and  a 
fluent  public  speaker,  but  as  he  advanced  in  years  he  became 
reduced  in  circumstances  until  he  was  obliged  to  accept  a  posi- 
tion as  messenger  in  the  Treasury  Department  and  was  assigned 
to  the  Currency  Bureau  for  duty.  He  was  wholly  unreliable, 
untrustworthy  and  perfectly  useless  as  a  messenger,  or  for  any 
clerical  service.  Whenever  the  chief  of  his  division  complained 
to  the  Comptroller  of  his  negligence  or  absence  from  duty  he 
would  invariably  defend  himself  with  such  skill  and  plausibility 
as  to  be  wholly  exonerated  from  blame  or  any  intentional  wrong- 
doing, and  escape  reprimanding.  He  borrowed  money  from 
everybody  who  would  lend  him  a  dollar,  with  no  ability  or  inten- 
tion of  paying  the  loan.  On  one  occasion  he  borrowed  ten  dollars 
from  the  chief  of  his  division  and  offered  him  as  security  for  the 
loan  two  handsomely  bound  volumes  of  classic  literature  worth 
many  times  the  amount  of  the  loan.  His  chief  took  these  volumes 
and  put  them  away  in  the  drawer  of  his  office  desk.  Several  days 
later,  when  the  chief  was  absent  from  the  office,  this  messenger 
stole  the  books  and  pawned  them  to  secure  another  loan.  He 
had  a  great  fondness  for  books  and  subscribed  for  the  latest  and 
best  publications,  obtaining  them  by  the  payment  of  a  small  sum 
on  the  installment  plan.     He  would  then  pawn  the  books  for  a 


ROMANCE  AND  TRAGEDY  OF  BANKING  219 

loan  considerably  in  excess  of  the  amount  of  the  payment. 
Finally,  the  claims  of  his  creditors  in  and  out  of  the  Treasury 
Department  became  so  numerous  and  annoying  that  the  chief 
clerk  of  the  department  sent  for  him  one  day  to  come  to  his  office 
for  the  purpose  of  asking  for  his  resignation,  but  instead  of  pro- 
curing the  resignation,  before  the  interview  ended,  the  messenger 
succeeded  in  borrowing  ten  dollars  from  the  chief  clerk  by  work- 
ing on  his  sympathies  in  his  usual  manner.  The  chief  clerk  fre- 
quently thereafter  related  this  incident  as  a  joke  upon  himself. 

These  were  some  of  the  unfortunate  types  of  men  whom  Mr. 
Dawes  in  the  kindness  of  his  heart  protected  and  befriended  while 
he  was  in  charge  of  the  Currency  Bureau. 

Liquidation  of  Receiverships 

At  the  date  Mr,  Dawes  assumed  charge  of  the  Currency 
Bureau  there  were  one  hundred  and  twenty-one  banks  in  the  hands 
of  receivers.  All  of  these  receiverships  had  progressed  to  a 
greater  or  less  degree  toward  final  liquidation.  The  cream  of 
the  assets  of  most  of  them  had  been  skimmed  off  by  Mr.  Dawes' 
predecessor  in  his  energetic  efforts  to  finally  close  as  many  of 
them  as  possible  before  retiring  from  office.  Every  asset  that 
could  possibly  be  converted  into  cash  had  been  collected,  com- 
promised or  sold.  In  consequence,  such  of  the  receiverships  as 
Mr.  Dawes  inherited  from  his  predecessor  contained  mostly,  if 
not  wholly,  assets  of  a  slow,  doubtful  or  worthless  character,  a 
considerable  portion  of  which  was  involved  in  litigation. 

Notwithstanding  this  fact,  Mr.  Dawes  set  vigorously  to  work 
to  reduce  the  expenses  of  these  receiverships  and  to  hasten  their 
final  closing.  Receivers'  salaries,  and  the  salaries  of  their  attor- 
neys and  clerks,  were  reduced  to  correspond  with  the  diminished 
assets  consequent  upon  the  progress  made  in  liquidation,  and  also 
by  the  consolidation  of  the  trusts  in  the  hands  of  fewer  receivers. 
As  a  result,  a  saving  of  at  least  one  hundred  thousand  dollars 
was  effected  during  the  first  ten  months  of  Mr.  Dawes'  adminis- 
tration. 

While  the  burden  fell  with  full  force  upon  Mr.  Eckels  to 
handle  the  unprecedented  number  of  bank  failures  that  occurred 


220  KOMANCE  AND  TRAGEDY  OF  BANKING 

during  his  administration  resulting  from  the  panic  of  1893  and 
to  set  the  machinery  in  motion  to  manage  the  numerous  receiver- 
ships, the  most  difficult  problems  growing  out  of  the  situation 
devolved  upon  Mr.  Dawes  to  solve,  involving  the  handling  and 
disposition  of  almost  every  conceivable  kind  of  property  and 
complications,  and  the  consideration  and  determination  of  the 
most  exacting  and  frequently  perplexing  questions. 

In  furtherance  of  his  policy  of  economy  in  the  administration 
of  receiverships,  Mr.  Dawes  conceived  and  put  in  operation  the 
plan  of  concentrating  in  the  hands  of  one  receiver,  located  in 
Washington,  all  inactive  trusts,  or  such  as  had  been  liquidated  to 
a  point  where  the  remaining  assets  were  of  a  nature  that  required 
nursing  and  would  involve  serious  sacrifice  under  a  forced  sale, 
consisting  principally  of  real  estate  and  claims  in  litigation. 
Nineteen  receiverships  of  this  character  were  removed  to  Wash- 
ington during  the  first  year  of  Mr.  Dawes'  administration,  and 
the  services  of  eighteen  independent  receivers,  together  with  their 
assistants,  clerks  and  office  expenses,  were  dispensed  with. 

Mr.  Dawes  was  led  to  the  adoption  of  this  policy,  as  he  stated 
in  his  first  annual  report,  because  of  the  fact  that  experience  had 
shown  that,  with  some  marked  exceptions,  the  indifference  of 
local  receivers  to  the  business  demands  of  their  trusts  had  a 
tendency  to  grow  as  the  assets  and  their  compensation  diminished. 

The  good  results  attained  from  this  policy  of  consolidation 
so  amply  justified  the  experiment  that  the  practice  has  since 
been  continued  by  his  successors  in  office. 

Second  Assessment  of  Stockholders 

Another  important  change  in  the  interests  of  the  creditors 
of  failed  banks  was  put  in  operation  by  Mr.  Dawes  almost  imme- 
diately after  assuming  charge  of  the  office. 

It  had  been  the  previous  practice  whenever  an  assessment  had 
been  made  upon  the  stockholders  of,  a  failed  bank  to  cover  the 
deficiency  in  assets,  to  regard  such  assessment  as  irrevocable  and 
unchangeable,  notwithstanding  the  fact  that  even  though  the 
liquidation  of  the  trust  demonstrated  that  the  estimated  valua- 


ROMANCE  AND  TRAGEDY  OF  BANKING  221 

tion  of  assets  on  which  such  assessment  was  based  was  erroneous 
and  the  deficiency  exceeded  the  amount  estimated. 

Mr.  Dawes  held  that  the  former  position  of  the  office  on  this 
question  was  inconsistent  with  the  exact  fulfillment  of  the  law,  as 
the  stockholders  were  liable  to  the  par  of  their  stockholdings  for 
all  the  debts  of  the  bank,  and  that  such  liability  could  be  enforced 
to  the  extent  of  one  hundred  per  cent,  by  one  assessment  or  by 
AS  many  as  were  found  to  be  necessary,  not  exceeding,  however, 
one  hundred  per  cent. 

The  contention  of  Mr.  Dawes  was  so  manifestly  correct  that 
the  wonder  is  that  the  Comptroller's  office  ever  held  a  contrary 
view,  and  his  position  was  subsequently  sustained  by  the  Supreme 
Court  of  the  United  States  in  the  case  of  Studebaker  v.  Perry, 
Receiver,  184<  U.  S.  258,  in  which  the  court  held  that  the  Comp- 
troller is  authorized  to  make  a  second  assessment  upon  the  share- 
holders of  an  insolvent  bank  where  the  first  assessment  proves 
insufficient  to  pay  the  debts  of  the  association,  so  long  as  the  total 
assessments  do  not  exceed  the  par  value  of  the  stock. 

National  Bank  Failures  During  Mr.  Dawes*  Administration 

Thirty-four  national  banks  were  placed  in  the  hands  of  re- 
ceivers during  Mr.  Dawes'  administration.  The  most  important 
of  these  failures  were  the  Chestnut  Street  National  Bank  of  Phila- 
delphia, Pa.,  and  the  Globe  National  Bank  of  Boston,  Mass. 

The  Chestnut  Street  National  Bank  was  closed  January  20, 
1898,  twenty  days  after  Mr.  Dawes  assumed  charge  of  the  Comp- 
troller's office,  and  remained  in  the  hands  of  the  bank  examiner 
until  January  29  following,  when  George  H.  Earle,  of  Philadel- 
phia, was  appointed  receiver. 

This  bank  had  a  capital  stock  of  $590,000  and  deposits 
aggregating  $1,700,000.  About  $1,200,000  of  these  deposits 
were  those  of  individuals,  firms  and  corporations  in  Philadelphia, 
and  the  balance  represented  accounts  of  banks  in  other  cities. 
William  M.  Singerly,  the  proprietor  of  The  Record  Publishing 
Company,  was  president  of  this  association,  and  W.  Steele  was 
its  cashier. 


222  ROMANCE  AND  TRAGEDY  OF  BANKING 

The  president  of  the  banlc  owned  twenty-eight  hundred  of  the 
five  thousand  shares  of  the  capital  stock,  and  was  also  the  owner 
of  nearly  all  of  the  capital  stock  of  The  Record  Publishing  Com- 
pany, and  regarded  himself  as  substantially  the  owner  of  the 
latter's  business.  The  company  appeared  to  be  a  paying  and 
prosperous  concern  and  in  no  need  to  borrow  money,  but  Singerly 
as  president  of  the  company  borrowed  from  himself  as  president 
of  the  bank  over  $382,000  on  notes  and  checks  of  the  company, 
and  apparently  without  the  knowledge  or  assent  of  the  directors 
of  the  company,  and  used  the  money  not  for  the  benefit  of  the 
company  but  for  his  own  purposes. 

While  the  bank  was  in  the  hands  of  the  examiner  efforts  were 
made  to  liquidate  it  without  the  intervention  of  a  receiver.  A 
plan  was  devised  to  capitalize  The  Record  Publishing  Com- 
pany at  $4,000,0C0,  to  be  divided  into  $1,500,000  of  preferred 
stock  and  $2,500,000  of  common  stock.  All  holders  of  the  com- 
pany's bonds  and  stocks  were  to  accept  for  their  claims  a  pro- 
portionate amount  of  the  new  issue  of  stock,  and  after  satisfying 
the  holders  of  mortgages  against  the  company  it  was  calculated 
that  enough  preferred  stock  would  be  left  to  discharge  the  presi- 
dent's indebtedness  to  the  bank.  The  bank  was  to  have  accepted 
stock  for  a  corresponding  amount  of  the  president's  obligations, 
the  value  of  the  stock  to  be  determined  by  the  earning  power  of 
the  company. 

This  plan  contemplated  the  restoration  of  the  bank  to  sol- 
vency, but  because  of  some  dissensions  among  the  creditors  it  was 
not  consummated  and  the  bank  was  finally  placed  in  the  hands  of 
a  receiver,  January  29,  1898,  after  having  been  previously  voted 
into  voluntary  liquidation  by  stockholders  owning  3948  of  its 
shares. 

The  Chestnut  Street  Trust  Company,  an  allied  institution, 
controlled  by  the  same  directors  who  controlled  the  bank,  failed  at 
the  same  time,  also  a  paper  mill  company  controlled  by  President 
Singerly.  The  failure  of  these  three  concerns  was  due  to  a  com- 
mingling of  politics,  the  newspaper  business  and  bank  manage- 
ment. Politics  and  newspaper  management  may  be  made  to  har- 
monize, but  politics,  like  religion,  will  never  blend  with  banking, 


ROMANCE  AND  TRAGEDY  OP  BANKING  223 

and  wherever  it  has  been  tried,  it  has  invariably  failed,  and  in 
most  cases  very  disastrously. 

The  stockholders  of  the  bank  were  assessed  one  hundred  per 
cent,  of  their  stockholdings,  or  $500,000,  of  which  amount  $178,- 
058  was  collected.  The  total  collections  from  all  sources  amounted 
to  $3,296,200.  The  creditors  were  paid  one  hundred  per  cent, 
of  their  claims,  with  interest  at  the  rate  of  six  per  cent,  per  annum 
from  the  date  of  failure,  and  $156,512  was  returned  to  the  share- 
holders. 

The  president  of  the  bank,  who  was  responsible  for  its  failure, 
died  suddenly  February  27,  1898. 

When  the  Chestnut  Street  National  Bank  failed,  its  affairs 
were  found  to  be  so  badly  involved  that  it  was  estimated  that  even 
with  an  assessment  of  one  hundred  per  cent,  on  the  stockholders 
the  assets  would  fall  far  short  of  yielding  sufficient  to  pay  the 
liabilities  to  depositors  and  other  creditors  in  full.     But  Presi- 
dent  Singerly,  before  his  death,  was  induced  to   assign  to  the 
receiver  of  the  bank  his  equity  in  a  large  portion  of  the  stock  of 
The  Record  Publishing  Company,  in  the  hope  that   something 
might  be  realized  through  this  source  for  the  unfortunate  cred- 
itors of  the  association.     From  the  date  of  this  assignment  the 
receiver  of  the  bank  and  his  associates  practically  managed  The 
Record  Publishing  Company,  which  was  a  good  paying  property, 
and  as  a  result  of  their  management,  the  securities  of  the  com- 
pany held  by  the  bank  greatly  increased  in  value.     These  securi- 
ties were  sold  by  the  receiver  at  public  auction  on  May  15,  1902, 
for  the  sum  of  $2,874,800,  and  from  the  proceeds  of  this  sale  the 
receiver  of  the  bank  realized  in  full  the  bank's  claim,  amounting 
to  over  $1,190,000. 

That  this  bank  was  able  to  pay  its  creditors  in  full  and  return 
such  a  substantial  sum  to  the  stockholders  was  due  wholly  to  the 
excellent  manner  in  which  the  affairs  of  the  trust  were  adminis- 
tered, and  the  good  management  and  business  judgment  displayed 
by  Comptroller  Dawes  and  the  receiver  in  connection  with  the 
liquidation  of  the  Singerly  indebtedness. 

The  failure  of  the  Chestnut  Street  National  Bank  and  the 
conditions  disclosed  immediately  following  its  suspension  was  the 


224  ROMANCE  AND  TRAGEDY  OF  BANKING 

one  weak  spot  in  Mr.  Eckels'  administration  of  the  Comptroller's 
office. 

This  bank  was  known  to  be  in  a  precarious  condition  for 
months  before  its  failure.  But  Mr.  Eckels'  confidence  in  Mr. 
Singerly's  ability  and  his  promises  to  extricate  the  bank  from  its 
perilous  situation  delayed  the  closing  of  the  institution  until  after 
Mr.  Dawes  assumed  charge  of  the  Comptroller's  office,  when  it 
was  discovered  that  Mr.  Eckels  had  been  grossly  deceived  as  to 
the  true  condition.  The  results  of  the  liquidation,  however,  were 
very  satisfactory  and  gratifying,  and  reflect  great  credit  upon 
Mr.  Dawes  and  the  receiver. 

The  affairs  of  the  Chestnut  Street  Trust  Company,  the  affili- 
ated institution,  were  closed  in  April,  1910,  by  the  payment 
of  a  final  dividend  of  four  per  cent.,  making  the  total  payments 
ninety-one  and  one-half  per  cent. 

Failure  of  the  Globe  National  Bank 

The  Globe  National  Bank  of  Boston,  Mass.,  closed  its  doors 
December  21,  1899,  and  was  placed  in  charge  of  a  national  bank 
examiner  in  the  hope  that  its  affairs  might  be  adjusted  so  as  to 
permit  the  early  resumption  of  business. 

The  bank  had  a  capital  stock  of  $1,000,000  and  individual 
deposits  at  the  date  of  suspension  amounting  to  $5,000,000. 
Charles  H.  Cole  was  president  of  this  institution,  and  Charles  H. 
Hooke,  cashier.  The  failure  was  caused  by  the  misapplication 
of  the  funds  of  the  association  by  the  president  for  his  own  use, 
to  the  extent  of  about  $1,600,000.  Six  hundred  thousand  dollars 
of  this  amount  was  paid  back  in  cash  by  the  president  and  his 
friends  immediately  after  suspension,  and  the  directors  made  good 
the  remainder  by  their  notes  and  securities.  The  troubles  of  the 
bank,  however,  were  greatly  aggravated  by  subsequent  deprecia- 
tion of  stocks  and  bonds  and  by  the  failure  of  a  local  firm  whose 
paper  was  largely  held  by  the  bank.  The  Clearing  House  Asso- 
ciation came  to  the  bank's  aid  in  an  effort  to  relieve  the  situation, 
but  the  general  conditions  at  that  time  were  such  as  to  make  the 
relief  ineffectual  as  to  resumption  of  business  by  the  bank,  and  it 


ROMANCE  AND  TRAGEDY  OF  BANKING  225 

became  necessary  to  appoint  a  receiver  for  the  institution  on 
January  1,  1900. 

An  assessment  of  one  hundred  per  cent,  was  levied  upon  the 
stockholders,  of  which  amount  $979,021  was  collected.  The  total 
collections  from  all  sources  aggregated  $6,994,389.  The  cred- 
itors were  paid  one  hundred  per  cent,  of  their  claims,  with  inter- 
est from  the  date  of  failure,  and  $5651  was  returned  to  the  stock- 
holders.    The  receivership  was  finally  closed  February  25,  1903. 

Charles  H.  Cole,  the  president  of  the  bank,  was  indicted  for 
misapplication  of  the  funds  of  the  institution.  He  pleaded  guilty 
and  was  sentenced  to  serve  eight  years  in  jail  at  Greenfield,  Mass. 
He  served  his  full  term,  less  the  usual  allowance  for  good  behavior, 
and  died  a  short  time  after  his  release. 


Defalcations  in  the  First  National  Bank  of  New  York 

In  October,  1900,  a  large  defalcation  was  discovered  in  the 
First  National  Bank  of  New  York  City.  During  the  progress 
of  the  regular  examination  of  this  bank  by  the  national  bank  ex- 
aminer, the  assistant  cashier  discovered  that  C.  L.  Alvord,  the 
note  and  exchange  teller,  was  short  in  his  cash  to  an  amount 
which  later  was  found  to  be  $690,000.  These  thefts  had  been 
going  on  for  a  long  time.  It  was  found  to  have  been  as  much 
as  $200,000  two  years  previous  to  the  discovery  of  the  shortage. 

The  method  of  operation  and  concealment  resorted  to  by  the 
defaulter  was  to  make  the  cash  on  hand  agree  with  the  amount 
for  which  the  teller  was  accountable,  as  shown  by  the  books  of 
the  bank,  by  taking  out  of  the  morning  mail,  of  which  he  had 
charge,  a  sufficient  number  of  cash  items  to  cover  the  aggregate 
amount  of  the  defalcations  and  add  them  to  the  exchanges  for 
the  Clearing  House  received  during  the  preceding  day.  Exami- 
nation of  the  exchanges  by  the  examiner  showed  the  total  amount 
to  be  correct,  but  $690,000  of  the  items  had  been  taken  from  the 
morning's  receipts  and  listed  with  the  previous  day's  exchanges. 
The  amount  of  the  morning  additions  were  reduced  correspond- 
ingly, so  that  the  sum  of  the  two  equalled  the  correct  amount. 

A  thorough  examination  of  the  teller's  accounts  disclosed  that 
his  stealings  covered  a  period  of  several  years.     While  absent  on 


226  RO^IANCE  AND  TRAGEDY  OF  BANKING 

a  two  weeks'  vacation  he  took  the  precaution  to  cover  his  short- 
age by  making  a  number  of  charges  to  out-of-tov/n  accounts  and 
credited  the  amount  on  his  return  before  the  monthly  statements 
were  sent  out.  Whenever  he  anticipated  an  examination  of  his 
cash,  or  a  periodical  examination  of  the  bank  by  the  bank  exam- 
iner, he  covered  the  shortage  by  false  charges  against  large 
accounts. 

While  the  bank  examiner  did  not  discover  this  defalcation, 
his  examination  of  the  bank  one  month  earlier  than  the  time  for 
the  regular  examination  prevented  Alvord  from  manipulating  the 
figures  as  he  had  been  in  the  habit  of  doing,  and  a  change  made 
by  him  on  a  slip  of  paper  later  in  the  day  while  the  examination 
was  in  progress  aroused  the  suspicion  of  one  of  the  bank's  officers 
and  caused  an  inquiry  to  be  made  at  the  Clearing  House,  when  it 
was  discovered  that  the  two  items  of  previous  day's  exchanges 
and  the  morning  additions  did  not  correspond  with  the  list  checked 
by  the  examiner.  This  led  to  a  count  of  the  current  day's  cash 
and  the  checks  in  hand,  which  revealed  a  shortage  of  $693,000. 

There  is  no  way  to  accurately  check  the  accounts  of  an  em- 
ployee if  he  has  access  to  the  preceding  day's  cash  from  which  to 
make  good  a  shortage  of  the  current  day,  and  this  fatal  defect 
in  the  system  employed  by  the  First  National  Bank  afforded  the 
opportunity  for  Alvord's  dishonesty  in  the  first  place  and  the 
means  of  successful  concealment  for  a  long  time. 

This  theft  could  probably  have  been  prevented,  and  certainly 
would  have  been  detected  sooner,  by  a  rotation  of  the  clerical 
force  of  the  bank,  thus  placing  each  department  under  super- 
vision of  different  employees  successively. 

Upon  discovery  of  the  shortage,  Alvord  fled  to  Boston,  where 
he  was  arrested  on  October  30,  1900,  and  brought  back  to  New 
York  City.  He  was  tried  and  convicted  in  the  United  States 
Circuit  Court  and  sentenced  to  a  term  of  thirteen  years  in  the 
penitentiary  at  Sing  Sing.  He  was  released  for  good  behavior 
after  serving  eight  years  and  went  to  Stockport,  N.  Y.,  where 
he  lived  until  the  date  of  his  death,  which  occurred  September  10, 
1912. 


ROMANCE  AND  TRAGEDY  OF  BANKING  227 

The  Currency  Laws 

In  his  first  annual  report  to  Congress  Mr.  Dawes  devoted  con- 
siderable space  to  a  discussion  of  the  banking  and  currency  laws 
of  the  United  States,  which,  he  stated,  seemed  to  ignore  the  inter- 
ests of  the  depositors  in  the  banks,  with  whose  protection  the 
Comptroller  was  particularly  charged. 

In  analyzing  the  various  suggestions  for  reforming  the  cur- 
rency laws  that  were  being  advanced  at  that  time,  Mr.  Dawes 
summed  them  up  into  two  main  propositions,  as  follows : 

First,  That  the  disproportion  between  outstanding  currency 
liabilities  of  the  Government,  payable  in  gold,  and  the,  gold  held 
for  their  redemption,  should  be  lessened  by  a  contraction  in  the 
amount  of  the  demand  currency  liabilities. 

Second,  That  the  void  in  circulation  that  would  be  caused 
by  such  contraction,  should  be  filled  by  an  extension  of  the  circu- 
lation of  the  national  banks,  which  circulation,  redeemable  in 
gold,  would  ultimately  depend  for  its  chief  security  upon  a  first 
lien  on  the  commercial  assets  of  the  issuing  banks. 

The  more  important  of  these  two  plans,  he  stated,  embodied 
in  the  ablest  forms  the  general  principles  necessarily  involved  in 
a  S3'stem  of  banknote  issues,  secured  by  the  general  assets  of  the 
banks,  and  looked  to  the  ultimate  displacement  of  Government 
credit  money  by  a  first  lien  upon  the  assets  of  the  issuing  banks 
and  by  a  five  per  cent,  redemption  fund  created  in  the  first  instance 
by  a  taxation  upon  solvent  issuing  banks  and  thus  maintained. 

In  the  event  of  any  deficiency  occurring  in  such  contributions 
to  the  guaranty  fund,  resort  would  be  had  to  additional  taxation 
upon  the  solvent  banks  issuing  circulation  to  supply  the  defi- 
ciency, such  tax  not  to  exceed  one  per  cent,  on  the  amount  of 
their  note  issue  per  year. 

These  propositions,  Mr.  Dawes  stated,  assumed  that  unless 
there  was  to  be  a  currency  contraction,  some  radical  extension 
of  banknote  issues  was  absolutely  necessary  to  secure  the  proper 
adjustment  of  Government  currency  liabilities  to  the  gold  reserve, 
in  order  to  subserve  the  greater  safety  of  the  gold  standard,  and 
that  through  this  radical  extension  and  change  in  the  form  of 
banknote  issues  alone  was  elasticity  to  be  secured  in  our  currency. 


228  ROMANCE  AND  TRAGEDY  OF  BANKING 

As  opposed  to  these  propositions,  Mr.  Dawes  contended,  that 
there  existed  no  such  condition  of  finances,  revenues  or  credit  in 
the  United  States  to  justify  the  proposed  shifting  of  the  burden 
of  gold  redemption  of  outstanding  currency  from  the  Govern- 
ment to  the  banks,  or  to  make  necessary  any  radical  changes  or 
concessions  in  the  national  banking  laws  relative  to  note  issues, 
which  would  not  be  considered  wise,  if  the  interests  of  the  com- 
munity, irrespective  of  Government  finances,  were  alone  consid- 
ered. He  expressed  the  view  that  the  resources,  credit  and  finan- 
cial condition  of  the  United  States  were  such  that  by  means  of 
the  revenue  laws  and  other  amendments  suggested  by  President 
McKinley  in  his  message  to  Congress  at  that  time,  a  safer  ratio 
between  outstanding  circulation  and  gold  reserve  be  attained,  the 
stability  of  the  gold  standard  insured,  and  the  currency  main- 
tained upon  a  sound  basis  without  contraction. 

The  most  important  function  of  the  national  banks,  Mr. 
Dawes  held,  was  in  acting  in  the  capacity  of  middleman  between 
the  depositors  and  the  borrowers  of  a  community,  and  that  the 
note-issuing  function  of  the  banks  was  secondarj'  in  importance 
and  usefulness  under  the  then  or  any  proposed  system  of  bank- 
jiote  issues. 

It  was  especially  important,  therefore,  he  held,  that  in  any 
proposed  changes  in  the  laws  relating  to  the  note-issuing  powers 
of  the  banks,  the  relation  of  the  banks  to  their  depositors  and 
borrowers  should  be  carefully  considered. 


Preferment  of  Note-Holder  to  Depositor 

The  fundamental  basis  of  all  the  currency  reform  plans  that 
were  proposed  while  Mr.  Dawes  was  Comptroller,  contemplated 
making  the  note-holder  a  preferred  creditor  over  the  depositor. 
Mr.  Dawes  held  this  principle  to  be  not  only  inherently  wrong, 
but  unjustifiable  by  any  grounds  of  public  policy,  and  that  the 
practical  effect  of  such  a  measure  upon  the  relation  of  depositors 
to  the  banks  in  the  smaller  communities  of  the  United  States 
would  be  so  revolutionary  as  to  bring  about  the  most  injurious 
conditions  in  the  general  business  of  the  country. 


ROMANCE  AND  TRAGEDY  OF  BANKING  229 

The  Government  was  given  a  first  lien  upon  the  assets  of  a 
bank  for  any  deficiency  between  the  market  value  of  the  bonds 
deposited  to  secure  circulation  and  the  amount  of  the  circulation 
outstanding  against  such  bonds,  but  as  the  circulation  issued 
could  not  exceed  the  par  value  of  the  bonds  deposited  to  secure 
its  redemption,  and  as  the  bonds  were  redeemable  at  par  by  the 
Government,  it  never  was  and  probably  never  would  become 
necessary  for  the  Government  to  resort  to  this  lien  on  the  assets 
of  a  bank  to  redeem  its  circulation,  except  in  the  case  of  a  sale 
of  the  bonds  of  a  failed  bank  at  a  price  below  par.  If  the  bonds 
securing  the  circulation  of  an  active  association  fell  below  par  in 
the  market,  the  law  authorized  the  Comptroller  to  require  an  addi- 
tional deposit  of  bonds  to  cover  the  deficiency,  but  no  additional 
deposit  ever  was  required  when  the  market  price  of  the  bonds  was 
below  par. 

Mr.  Dawes  claimed  that  it  was  as  sound  in  principle  for  a 
bank  to  issue  banknotes  as  to  receive  deposits  when  the  note-holder 
and  the  depositor  stood  upon  the  same  footing  in  relation  to  the 
assets  of  the  bank,  but  it  was  not  as  sound  in  principle  when  in  the 
event  of  insolvency,  the  creditor  who  holds  a  note  of  the  bank 
claims  the  right  to  be  first  paid  in  full  before  the  creditor  who 
claims  as  a  depositor  can  receive  anything. 

Mr.  Dawes  expressed  the  opinion  that  the  preference  of  a  note- 
holder to  the  depositor  could  not  be  justified  upon  any  grounds  of 
public  policy  which  did  not  admit  the  injustice  to  the  depositor 
class  as  an  expedient  necessary  for  the  Government  to  resort  to 
as  a  means  of  securing  additional  and  a  different  kind  of  circula- 
tion than  that  issued  under  the  bond-secured  requirement. 

The  argument  usually  advanced  by  those  who  favored  a  pre- 
ferment of  the  note-holder  to  the  depositor  under  the  various 
plans  presented  for  an  asset  or  credit  currency  in  the  liquidation 
of  the  liabilities  of  national  banks,  was  that  the  depositor  volun- 
tarily selected  the  bank  in  which  to  deposit  his  money,  and  that  it 
is  incumbent  upon  him  to  inform  himself  beforehand  of  the  trust- 
worthiness of  the  institution,  while  the  notes  of  the  bank  are  issued 
for  general  circulation  and  pass  into  the  hands  of  those  who  have 
no  means  of  knowing  the  condition  or  the  solvency  of  the  associa- 
tion issuing  them. 


230    ROMANCE  AND  TRAGEDY  OF  BANKING 

This  line  of  reasoning  did  not  appeal  to  Mr.  Dawes,  as  com- 
mending itself  to  men  of  practical  views,  and  in  his  report  for 
1898,  he  disputed  the  logic  of  such  an  assumption,  as  follows: 

Experience  demonstrates  that  in  the  banking  business  the 
detection  of  untrustworthiness  in  banks  is,  as  a  matter  of 
fact,  not  one  of  the  duties  with  which  the  depositor,  as  a 
general  rule,  charges  himself.  He  has  come  to  leave  that  to 
the  officials  of  the  National  and  State  Governments;  and 
while  it  may  be  true  that  as  a  class  he  ought  to  exercise 
greater  discretion  in  his  selection  of  banks  for  his  deposit, 
it  is  equally  true  that  as  a  class  he  has  roh^e  to  have  the 
confidence  in  the  system  which  has  made  him  comparatively 
indifferent  under  normal  conditions  to  this   duty. 

Again,  he  is  often  compelled,  by  the  very  nature  of  his 
business,  to  be  dependent  upon  the  agency  of  banks  at  a 
distance  in  handling  his  funds,  in  which  case  he,  like  the 
noteholder,  could  not  investigate  if  he  so  desired. 

Certainly  the  fundamental  right  to  prefer  in  the  distribu- 
tion of  the  assets  of  an  insolvent  bank  the  note-holding 
class  to  the  depositor  class,  should  rest  upon  some  broader 
ground  than  the  assumed  neglect  of  the  depositor  class  to 
acquaint  itself  with  the  nature  of  the  private  business  and 
internal  management  of  banking  institutions,  whose  proper 
supervision  the  National  Government,  as  the  representative 
of  the  depositors  and  the  public,  has  taken  upon  itself. 

The  lien  given  to  the  note-holder  under  the  present  sys- 
tem, first  upon  the  Government  bonds  deposited  expressly 
in  trust  as  security  for  said  notes,  before  other  assets  of 
the  bank  can  be  reached,  is  far  different  in  practical  effect 
from  the  general  and  unqualified  priority  in  lien  upon  the  as- 
sets of  a  bank  proposed  in  these  plans. 

The  priority  of  lien  of  the  note-holders  under  the  pres- 
ent system  over  the  depositors,  is  first  upon  the  United 
States  bonds  deposited  in  trust  for  their  benefit,  and  only 
secondarily,  in  case  of  deficiency  in  bonded  security,  upon 
the  general  assets  of  the  bank.  In  practical  operation  this 
security  gives  the  notes  the  unquestioned  credit  necessary 
to  enable  them  to  circulate,  and  at  the  same  time  does  not, 
as  a  matter  of  fact,  interfere  with  the  rights  of  the  depositor 
in  case  of  insolvency,  since  the  bonds  at  public  sale  bring 
the  amount  of  the  notes,  and  return  to  the  insolvent  bank 


ROMANCE  AND  TRAGEDY  OF  BANKING  231 

for  the  benefit  of  the  general  creditors   practically   all  the 
equity  originally  invested  in  them. 

This  being  the  practical  effect  of  the  present  bank-note 
system,  it  cannot  rightfully  be  considered  as  justifying 
any  assumption  that  in  its  theory  the  rights  of  noteholders 
are  considered  as  more  sacred  in  themselves,  than  the  rights 
of  depositors. 

Under  the  present  system  the  relation  of  the  note-issues 
of  a  national  bank  to  its  general  business,  is  somewhat  the 
same  as  the  relation  of  the  issue  and  redemption  department 
of  the  Bank  of  England,  to  its  commercial  department.  They 
are  in  reality  almost  entirely  separate,  and  so  intended  to  be. 

If  under  any  new  system,  the  note-holder  and  the  deposit 
holder  come  into  similar  relations  to  the  bank,  their  rights 
against  the  common  assets,  to  which  their  money  has  alike 
contributed,  should  be  equally  sacred. 

If  then,  there  is  no  inherent  moral  right  to  establish  a 
preference  of  the  note  holding  creditors  of  an  insolvent 
bank  as  against  the  deposit  holding  creditors,  in  the  distribu- 
tion of  the  assets  of  an  insolvent  bank,  the  question  arises, 
does  public  opinion  demand,  in  the  interest  of  the  common 
good,  that  such  a  preference  should  be  given  in  order  to 
establish  a  bank-note  system  which  will  give  banks  such  a 
profit,  that  to  secure  it  they  will  relieve  the  United  States 
Treasury  of  the  burden  of  gold  redemption,  and  afford  the 
country  a  circulating  medium  having  alleged  advantage  over 
that  now  in  use. 

In  concluding  the  discussion  of  this  subject,  Mr.  Dawes  sum- 
marized his  views  upon  the  currency  plans  suggested,  as  follows : 

First.  As  a  fundamental  proposition,  any  bank-note 
system  depending  for  security  upon  the  commercial  assets 
of  banks,  and  sanctioned  by  government,  should  be  inher- 
ently fair  in  its  relation  to  the  deposit  holding  creditors 
and  the  note  holding  creditors   of  an  insolvent  bank. 

Second.  No  system  is  inherently  fair  which  creates  a 
preference  of  the  note  holder  over  the  deposit  holder  in  the 
distribution   of  the   assets   of   an   insolvent  bank. 

Third.  In  none  of  the  older  countries,  to  the  success  of 
whose  uncovered  note  systems  we  are  referred  as  tending 
to  justify  the  experiment  in  this  country,  is  the  note-holder 


232  ROIVIANCE  AND  TRAGEDY  OF  BANKING 

by  the  law  preferred  over  the  deposit  holder,  in  case  of 
insolvency  of  banks  of  issue.  Canada,  with  its  thirty-eight 
central  banks  of  issue,  as  compared  with  thirty-six  hundred 
scattered  national  banks  in  this  countr}'^,  furnishes  the  only 
exception  to  this  rule. 

Fourth.  The  necessity  of  the  preference  under  any  such 
system  in  this  country,  to  give  security  and  credit  to  the 
notes,  demonstrates  that  it  is  the  depositors  of  the  country 
and  not  the  banks  upon  whom  the  great  weight  of  the  guar- 
antee of  the  note   issues   must   fall. 

Fifth.  A  fairer  system  would  provide  that,  when  a  re- 
ceiver took  charge  of  an  insolvent  bank,  he  should  not  first 
pay  into  the  general  redemption  fund  held  by  the  Govern- 
ment, an  amount  derived  from  the  assets  of  the  bank  suffi- 
cient to  pay  the  note  holders  in  full  before  paying  anything 
to  depositors,  but  he  should  pay  into  the  fund  that  pro  rata 
share  of  the  proceeds  derived  from  the  assets,  which  should 
go  to  the  note  holders,  not  as  preferred  creditors,  but  as 
creditors  in  the  same  class  as  depositors. 

Sixth.  If  under  such  a  system,  owing  to  causes  to 
which  we  have  referred,  the  tax  upon  the  solvent  banks 
would  be  so  large  as  to  render  the  issue  of  such  currency 
unprofitable  and  unattractive  to  the  banks,  it  would  be 
a  demonstration  of  the  radical  difference  in  the  environ- 
ment and  condition  of  our  banking  system  as  compared  with 
the  more  centralized  and  older  systems  of  Europe.  It 
would  be  a  demonstration  of  the  fact  that,  under  the  pro- 
posed legislation,  while  the  banks  would  take  the  profits 
upon  the  circulation,  the  depositors  would  take  the  bulk  of 
the  losses. 

Seventh.  Such  a  system  of  uncovered  notes  as  this  pro- 
posed, providing  for  a  preference  of  the  note  holders  over 
other  creditors,  would  interfere  radically  with  the  more 
important  functions  of  national  banks,  to  which  the  note- 
issuinff  function   is   secondary   and   subordinate. 

Eighth.  The  Government  of  the  United  States  is  not  in 
such  straits,  in  connection  with  its  present  currency  system, 
as  to  compel  it  to  enter  into  a  plan  of  currency  changes, 
by  which  it  in  effect  sells  extended  and  valuable  currency 
privileges  to  the  national  banks  of  the  country,  in  exchange 
for  assistance  from  them  in  meeting  its  present  government- 
al  currency   obligations   payable   in   gold. 


ROMANCE  AND  TRAGEDY  OF  BANKING  233 

Ninth.  If  the  present  conditioj;is  of  governmental  cur- 
rency demand  reforms  to  secure  which  will  entail  cost,  it 
is  better  for  the  Government,  as  the  representative  of  all 
the  people,  and  under  all  circumstances  connected  with  our 
banking  system,  to  pay  an  ascertained  and  exact  cost  direct, 
than  to  endeavor  to  evade  it  by  granting  extensive  currency 
privileges  to  banks,  which  of  necessity  must  reimburse  them- 
selves from  the  community  and  the  depositor  class  for  any 
cost  which  they  incur  in  assuming  the  burden  of  gold  re- 
demption, or  maintaining  the  credit  of  their  notes. 


Currency  Legislation  Suggested 

All  writers  on  the  subject  of  our  bond-secured  banknote  cir- 
culation have  agreed  on  this  one  fact,  and  it  is  about  the  only  one 
they  did  agree  upon,  that  the  most  serious  defect  in  the  system 
was  its  inelasticity  and  consequent  inability  to  automatically  ex- 
pand in  times  of  enforced  liquidation  due  to  commercial  and  bank 
panics.  As  a  means  of  correcting  this  defect,  Mr.  Dawes  recom- 
mended the  following  amendments  to  the  laws  governing  the  issue 
of  national  bank  notes : 

First.  The  existing  bank-note  system,  based  upon  de- 
posit of  Government  bonds  as  security,  should  not  now  be 
abandoned. 

Second.  For  the  purpose  of  allowing  elasticity  to  bank- 
note issues  to  protect  the  banks  and  the  community  in  time 
of  panic,  a  small  amount  of  uncovered  notes,  in  addition  to 
the  secured  notes,  should  be  authorized  by  law  under  the 
following  limitations:  They  should  be  subjected  to  so  heavy 
a  tax  that  they  could  not  be  issued  in  normal  times  for  the 
purpose  of  profit,  but  would  be  available  in  times  of 
emergency.  The  tax  should  be  so  large  upon  the  solvent 
issuing  banks  as  to  provide  a  fund  which,  in  connection 
with  the  pro  rata  share  of  the  assets  of  an  insolvent  bank, 
would  be  sufficient  to  redeem  the  notes  in  full,  without  neces- 
sitating any  preference  of  note  holders  over  depositors  of 
any  insolvent  issuing  bank.  The  tax  should  be  so  large  as 
to  force  this  currency  into  retirement  as  soon  as  the . 
emergency  passes. 


234  ROMANCE  AND  TRAGEDY  OF  BANKING 

Such  a  currency  could  be  used  only  to  lessen  the  evil 
effects  of  the  too  rapid  liquidation  of  credits  which  are 
collapsing  under  a  financial  panic,  but  could  not  he  profit- 
ably used  as  a  basis  of  business  speculation  and  inflation. 
It  should  be  to  the  business  community  what  the  clearing 
house  certificates  are  to  our  cities  in  times  of  panic — a 
remedy  for  an  emergency,  not  an  instrument  of  currency 
business. 

The  Act  of  May  30,  1908,  known  as  "The  Emergency  Cur- 
rency Law,"  practically  incorporated  in  its  provisions  the  fore- 
going views  expressed  by  Mr.  Dawes,  by  providing  for  additional 
■circulation  at  a  higher  rate  of  taxation,  in  times  of  emergency,  to 
be  issued  through  Currency  Associations  or  by  individual  banks 
upon  the  security  of  their  assets  having  circulation  outstanding 
secured  by  United  States  bonds  of  not  less  than  forty  per  cent,  of 
their  capital  stock. 

Amendments  to  the  Banking  Laws  Recommended  hy  Mr.  Dawes 

In  his  annual  reports  to  Congress  Mr.  Dawes  recommended 
the  following  amendments  to  the  banking  laws: 

That  the  limitation  placed  upon  the  liabilities  to  any  associa- 
tion of  any  person,  company,  corporation  or  firm  for  money  bor- 
rowed, shall  not  apply  where  a  loan  in  excess  of  the  prescribed 
limit  shall  be  less  than  two  per  cent,  of  the  total  assets  of  the  bank 
at  the  time  of  making  the  loan,  such  loan  to  be  at  all  times  pro- 
tected by  collateral  security  equal  to  or  greater  in  value  than  the 
excess  in  the  amount  of  the  loan  over  the  limit  at  that  time  based 
upon  the  capital  stock  of  the  bank. 

He  also  recommended  that  a  strict  and  enforcible  penalty  be 
provided  for  infractions  of  this  suggested  amendment,  so  as  to 
enable  the  Comptroller  to  compel  compliance  with  its  terms. 

In  suggesting  this  amendment  Mr.  Dawes  expressed  the  opin- 
ion that  while  it  would  have  the  effect  of  compelling  a  safe  and 
proper  distribution  of  the  loans  of  larger  banks,  it  would  at  the 
same  time  enable  them  to  loan  more  nearly  the  same  per  cent,  of 
their  total  assets,  as  the  law  permitted  the  smaller  banks  to  make 


ROMANCE  AND  TRAGEDY  OF  BANKING  235 

and  to  supply  the  needs  of  borrowers  in  the  larger  communities 
within  the  limitations  of  the  statute. 

He  stated  that  the  size  of  a  loan  is  of  itself  no  indication  of  its 
strength  or  weakness,  if  it  is  not  such  as  to  be  an  undue  concen- 
tration of  the  assets  of  the  institution  in  the  hands  of  one  individ- 
ual or  concern.  He  did  not  regard  it  as  wise  to  deprive  the 
creditors  and  shareholders  of  a  bank  of  the  safety  of  the  law  of 
average,  either  upon  economic  grounds  or  upon  the  grounds  of 
public  policy. 

For  the  purpose  of  illustrating  the  effect  of  the  law  as  it 
existed  in  1908,  limiting  loans  to  ten  per  cent,  of  the  capital  of 
the  bank,  Mr.  Dawes  presented  a  table  in  his  report  for  that  year 
showing  the  average  maximum  loan  to  average  resources  allowed 
under  the  ten  per  cent,  limit  based  upon  capital  stock  to  be  as 
follows : 

New  York  City  banks,  56/100  of  one  per  cent. 
Chicago  banks,  98/100  of  one  per  cent. 
St.  Louis  banks,  1.4  per  cent. 
Reserve  city  banks,  1.51  per  cent. 
Country  banks,  2.14  per  cent. 

Mr.  Dawes  recommended  that  domestic  branch  banks  be 
authorized  to  be  maintained  in  communities  of  less  than  two  thou- 
sand inhabitants,  in  order  to  afford  banking  facilities  in  small 
communities  that  could  not  afford  to  maintain  a  bank  with  a  capi- 
tal of  fifty  thousand  dollars,  the  minimum  capital  then  allowed  by 
law. 

At  the  time  this  recommendation  was  made  the  law  had  not 
been  amended  authorizing  the  establishment  of  national  banks 
with  a  minimum  capital  of  twenty-five  thousand  dollars  in  places 
the  population  of  which  did  not  exceed  three  thousand  people. 

In  his  report  for  1900  Mr.  Dawes  recommended  the  passage 
of  a  bill  introduced  by  Representative  Marriott  Brosius,  chair- 
man of  the  Committee  on  Banking  and  Currency,  in  the  First  Ses- 
sion of  the  Fifty-sixth  Congress,  "For  the  better  control  of  and 
to  promote  the  safety  of  national  banks." 

This  bill  was  designed  to  insure  a  greater  degree  of  safety  in 
loans  to  officers  and  directors  of  the  banks.    It  recognized  the  dis- 


236  ROMANCE  AND  TRAGEDY  OF  BANKING 

tinction  in  the  relations  of  directors  to  a  bank  and  those  sustained 
by  executive  officers  of  the  association,  and  prohibited  any  loan 
being  made  to  the  president,  vice-president,  cashier,  or  any  clerk, 
teller,  bookkeeper  or  other  person  in  the  employ  of  the  bank, 
except  upon  the  previous  approval  of  a  majority  of  the  board  of 
directors  constituting  a  quorum,  or  the  executive  committee  of 
the  board,  and  for  any  violation  of  this  restriction  provided  a  pen- 
alty of  not  more  than  five  thousand  dollars  or  imprisonment  for 
not  more  than  five  years,  or  both. 

It  also  provided  that  the  board  should  fix  by  resolution,  duly 
spread  upon  the  minutes,  the  limit  of  credit  to  be  extended  to  any 
director.  Where  no  such  limit  of  credit  was  fixed  by  the  board, 
no  loan  should  be  made  to  a  director  without  the  previous  ap- 
proval of  the  board  in  the  same  manner  that  loans  were  made  to 
officers  and  employees  of  the  bank.  For  any  violation  of  this  pro- 
vision, a  penalt}^  was  provided  that  the  association  should  forfeit 
to  the  United  States  a  sum  equal  to  double  the  amount  of  the 
interest  charged  by  the  bank  upon  such  loan,  to  be  collected  by  the 
Comptroller  and  covered  into  the  Treasury  of  the  United  States. 

This  bill  also  prohibited  overdrafts  by  any  officer  or  employee 
of  the  bank,  and  provided  for  carrying  into  effect  the  recommen- 
dation of  Mr.  Dawes,  heretofore  referred  to,  in  regard  to  the  limi- 
tation of  loans. 

On  the  subject  of  bank  reserves,  Mr.  Dawes  expressed  the 
belief  that  too  great  latitude  is  given  the  banks  in  connection  with 
the  use  of  their  reserves,  and  recommended  that  the  law  be 
amended  requiring  a  larger  proportion  of  the  reserve  to  be  kept 
in  cash  in  the  vaults  of  the  bank,  for  the  reason  that  the  ability  of 
the  banks  to  use  credits  with  reserve  agents  as  a  basis  of  loans 
creates  too  great  an  extension  of  aggregate  deposit  credits,  as 
compared  with  aggregate  cash  resources. 

This  condition,  Mr.  Dawes  contended,  increased  in  times  of 
liquidation  and  financial  panic  the  necessity  for  the  banks  to 
demand  payment  of  loans  and  added  to  the  demoralization  of  busi- 
ness. He  expressed  the  opinion  that  by  increasing  the  restrictions 
upon  the  right  of  the  banks  to  count  deposits  with  reserve  agents 
as  cash,  a  firmer  and  safer  foundation  would  be  built  under  the 
deposit  credits  of  the  country,  and  in    times    of    liquidation    the 


ROMANCE  AND  TRAGEDY  OF  BANKING  237 

greater  strength  of  the  banks  would  more  than  compensate  them 
for  the  loss  of  the  small  amount  of  interest  on  a  portion  of  their 
balances  which  would  result  from  a  change  in  the  law. 

The  Comptroller  therefore  recommended  that  one-fifth,  in- 
stead of  three-fifths  of  the  reserve  of  fifteen  per  cent,  then 
required  by  law  to  be  kept  by  banks  not  reserve  agents  may  con- 
sist of  balances  due  from  reserve  banks,  and  that  the  law  permit- 
ting reserve  city  banks  to  keep  one-half  of  their  reserve  with  cen- 
tral reserve  city  banks  be  repealed. 

The  adoption  of  the  amendments  suggested  by  Mr.  Dawes 
would  have  prevented  the  concentration  of  so-called  reserve  in  the 
three  central  reserve  cities  of  New  York,  Chicago  and  St.  Louis, 
which  funds  in  times  of  panic,  such  as  in  1907,  were  shown  not  to 
be  reserve  at  all,  but  simply  loans  not  available  on  demand. 

Reserve  Cities  with  Population  of  Twenty-jive  Thousand 

In  April,  1900,  the  Finance  Committee  of  the  United  States 
Senate  requested  an  expression  of  opinion  from  Mr.  Dawes  on  a 
"bill  then  pending  before  that  committee  to  permit  cities  with  a 
population  of  twenty-five  thousand  to  become  reserve  cities  upon 
application  of  three-fourths  of  the  national  banks  located  therein. 
This  bill  became  a  law  on  March  3,  1903. 

In  commenting  upon  this  proposed  amendment  to  the  law,  Mr. 
Dawes  stated  that  there  should  be  a  radical  modification  of  the 
law  in  regard  to  reserves,  and  that  greater  restrictions  should  be 
placed  upon  the  right  of  a  bank  to  count  as  a  part  of  its  legal 
reserve  so  large  an  amount  of  credit  with  a  reserve  agent.  The 
law  as  it  existed  then,  he  stated,  allowed  too  great  a  latitude  to 
the  banks  to  use  reserve  credits  for  the  purpose  of  increasing  their 
business,  thereby  increasing  too  greatly  the  disproportion  between 
the  deposit  liabilities  of  the  banks  and  the  aggregate  cash  re- 
sources with  which  to  meet  them. 

No  matter  how  many  reserve  cities  were  created  the  rate  of 
interest,  he  contended,  or  the  terms  upon  which  balances  could  be 
used,  together  with  the  facilities  for  exchange  at  the  principal 
moneyed  centers,  would  largely  control  the  selection  of  corre- 
spondents.    The  demand  for  New  York  and  Chicago  exchange 


238  ROMANCE  AND  TRAGEDY  OF  BANKING 

would  always  necessitate  the  selection  of  banks  in  those  cities  as 
correspondents  of  interior  banks.  He  expressed  the  belief  that 
the  provisions  of  law  then  in  force  in  respect  to  reserve  deposits, 
in  their  practical  effect,  were  productive  of  harm  to  the  legitimate 
business  interests  of  the  country,  and  for  that  reason  he  recom- 
mended that  they  should,  to  some  extent,  be  modified.  The  dis- 
proportion between  the  deposit  credits  in  the  banks  and  the 
amount  of  cash  actually  held  as  reserve  against  them  was  consid- 
erably less  than  fifteen  per  cent,  of  the  aggregate  deposit 
liabilities. 

Every  national  bank  in  the  country  was  pi-esumed  by  law  to 
be  on  a  conservative  basis,  so  far  as  its  ability  to  redeem  deposits 
was  concerned,  when  it  had  on  hand  in  cash,  and  on  deposit  with 
approved  reserve  agents,  twent3'-five  per  cent,  of  the  amount  of 
its  total  deposits. 

In  the  smaller  cities  or  towns  a  less  proportion  of  cash  and 
cash  resources  to  total  deposits  was  deemed  legally  consistent  with 
conservative  banking.  When  the  cash  and  reserve  accounts  ex- 
ceeded to  any  extent  the  twenty-five  per  cent,  limit,  the  bank, 
under  the  generally  accepted  rule,  could  safely  loan  the  excess;  In 
the  determination  of  its  ability  to  loan,  a  bank  did  not  ordinarily 
consider  the  relation  of  the  amount  of  cash  in  the  vaults  to  the 
amount  of  its  credits  with  reserve  agents,  for  the  reason  that  in 
usual  practice  the  reserve  agent  would  remit  when  called  upon,  or 
the  bank  could  sell  for  cash  to  neighboring  banks,  exchanges 
drawn  against  its  balance  with  the  reserve  agent.  It  is  the  rela- 
tion of  the  sum  of  the  cash  and  reserve  balances  to  deposits  which 
determines  whether  or  not  the  bank  is  in  a  condition  to  loan. 

The  fact  that  national  and  other  banks  were  allowed  to  loan 
on  the  strength  of  their  deposits  in  other  banks,  as  well  as  on 
account  of  the  cash  actually  held  in  their  vaults,  meant  that  the 
actual  cash  held  by  them  into  which  checks  and  drafts  were  by 
their  terms  and  by  practice  concurrently  convertible,  was  much 
less  than  twenty-five  per  cent,  of  the  deposits.  This,  together 
with  the  fact  that  one  bank  would  credit  as  a  deposit  redeemable 
in  cash  a  check  on  another  bank,  meant  that  the  banks  added  to 
the  purchasing  power  of  the  community,  or,  in  other  words,  cre- 
ated deposit  credits  for  the  community. 


ROMANCE  AND  TRAGEDY  OF  BANKING  239 

Mr.  Dawes  expressed  a  doubt  as  to  whether,  taken  as  a  whole, 
the  handling  of  large  bank  deposit  balances  is  profitable  to  the 
banks.  Bank  balances  are  the  most  unstable  of  all  deposits,  he 
said,  and  are  the  most  expensive  accounts,  not  only  because  of  the 
interest  paid  on  them  but  because  of  their  extreme  activity. 
Through  such  accounts  the  reserve  cities  were  subject  to  a  strain 
in  times  of  financial  stress,  which  endangered  the  stability  of  the 
entire  banking  system.  A  large  number  of  bank  deposit  accounts 
swells  the  totals  of  a  bank's  statement,  and  perhaps  serves  to 
attract  other  business  of  a  more  desirable  nature,  but  the  advan- 
tages of  such  business  are  exceedingly  doubtful. 

Recognizing  the  instability  of  such  deposits,  the  banks,  Mr. 
Dawes  stated,  must  loan  their  money  on  call,  and  to  secure  suf- 
ficient call  loans,  they  must  go  into  the  speculative  exchanges, 
for  it  is  only  by  loaning  upon  speculative  securities  that  the  banks 
are  enabled  to  pay  the  high  rate  of  interest  on  bank  balances, 
which  is  the  attraction  to  the  country  banks  for  the  deposit  of  a 
greater  proportion  of  their  funds  in  New  York  than  is  needed  for 
clearances  or  exchanges. 

By  way  of  illustrating  the  correctness  of  this  reasoning,  Mr. 
Dawes  called  attention  to  the  fact  that  during  his  term  as  Comp- 
troller there  occurred  a  marked  demonstration  of  the  evil  effects 
of  the  practice  referred  to  upon  the  legitimate  business  of  the 
country.  At  that  time  there  was  a  material  slackening  in  the 
demand  for  money  in  the  interior  of  the  country,  and  the  country 
banks  found  it  difficult  to  safely  loan  their  funds.  As  a  result  the 
interest  paid  by  the  eastern  banks  upon  deposit  balances  at- 
tracted an  immense  surplus  to  New  York  City  and  other  eastern 
cities.  This  redundancy  of  money  in  New  York  and  the  ease  with 
which  loans  upon  speculative  collaterals  could  be  obtained,  imme- 
diately created  a  speculative  movement  in  stocks  which  was  car- 
ried on  with  a  constantly  rising  range  of  prices  until  the  fall  of 
that  year.  At  that  time  the  crop  movement  in  the  West  and  the 
rising  rate  of  interest  in  the  inerior  compelled  the  banks  of  those 
sections  to  draw  upon  their  balances  in  New  York  and  to  order 
the  remittances  of  large  amounts  of  currency.  At  that  time  the 
business  of  the  country  was  in  a  prosperous  condition,  with  a  ten- 
dency toward  an  increase  in  general  prices  and  the  wages  of  labor. 


240    ROMANCE  AND  TRAGEDY  OF  BANKING 

There  was  no  lack  of  confidence  in  the  country  and  nothing  which 
indicated  panic  conditions,  but  the  demands  of  the  banks  of  the 
West  for  the  shipment  of  currency  on  deposit  with  reserve  agents 
resulted  in  a  panic  upon  the  Stock  Exchange  of  New  York,  which 
became  a  grave  menace  to  the  business  interests  of  the  entire  coun- 
try, by  curtailing  ordinary  credits  to  legitimate  business  and  com- 
mercial enterprises  to  such  an  extent  as  would  have  resulted  in 
great  damage  had  not  the  Secretary  of  the  Treasury  come  to  the 
relief  of  the  money  market  and  checked  the  rapidly  increasing 
stringency. 

While  the  exchange  business  of  the  interior  banks  always  will 
necessitate  large  deposit  balances  in  New  York  and  other  reserve 
cities,  and  higher  rates  of  interest  will  attract  idle  funds  to  the 
money  centers,  Mr.  Dawes  suggested  that  public  policy  demanded 
that  the  banks  of  the  country  should  be  required  to  keep  a  larger 
proportion  of  their  reserve  at  home  in  their  own  vaults  for  the 
protection  of  the  interests  of  their  depositors  in  times  of  stress. 

By  increasing  the  restrictions  upon  the  right  of  banks  to 
count  deposits  with  reserve  agents  as  cash,  he  said,  a  firmer  and 
safer  foundation  would  be  built  under  the  deposit  credits  of  the 
country,  and  in  times  of  liquidation  the  greater  strength  of  the 
banks  would  more  than  compensate  for  the  loss  of  the  small 
amount  of  interest  on  a  portion  of  their  bank  balances. 

Mr.  Dawes  therefore  recommended  that  the  law  be  so  amended 
as  to  permit  only  one-fifth,  instead  of  three-fifths,  of  the  fifteen 
per  cent,  reserve  then  required  to  be  kept  by  banks  not  reserve 
agents,  to  consist  of  balances  due  from  reserve  agents,  and  that 
the  provision  of  law  which  permitted  banks  in  reserve  cities  to 
keep  one-half  of  their  lawful  money  reserve  with  correspondent 
banks  in  central  reserve  cities  be  repealed,  thus  requiring  them  to 
keep  on  hand  at  all  times  in  their  own  vaults  the  twenty-five  per 
cent,  reserve  then  required  by  law  to  be  maintained. 

Mr.  Dawes  renewed  the  recommendation  that  had  been  so  fre- 
quently presented  by  his  predecessors  for  a  change  in  the  method 
of  compensating  national  bank  examiners,  from  a  fee  basis  to  a 
salary  allowance.  The  fee  system,  he  contended,  encouraged 
superficiality  in  examinations  and  interfered  with  a  proper  appor- 


ROMANCE  AND  TRAGEDY  OF  BANKING  241 

tionment  of  the  examiner's  time  among  the  different  banks  on  his 
list  for  examination. 


Amendments  to  the  Banking  Laws 

While  only  two  amendments  to  the  national  banking  laws  were 
enacted  during  Mr.  Dawes'  administration  as  Comptroller,  one  of 
these  had  a  very  important  bearing  upon  the  growth  of  the 
national  banking  system. 

The  Act  of  March  14,  1900,  authorized  the  formation  of 
banks  with  a  minimum  capital  of  twenty-five  thousand  dollars,  in 
places  the  population  of  which  did  not  exceed  three  thousand 
inhabitants.  Since  this  enactment  on  June  30,  1922,  4,323  banks, 
with  a  capital  each  of  less  than  fifty  thousand  dollars,  have  been 
added  to  the  system. 

The  same  Act  also  increased  the  maximum  circulation  that 
banks  might  issue  to  an  amount  equal  to  the  par  value  of  the  bonds 
deposited  as  security  therefor,  and  increased  the  amount  of  bonds 
that  could  be  received  for  circulation  to  an  amount  equal  to  the 
paid-in  capital  stock  of  the  bank. 

Before  the  adoption  of  this  amendment  to  the  law,  circulation 
was  limited  to  ninety  per  cent,  of  the  current  market  value  of  the 
bonds  deposited,  not  exceeding  par,  and  the  total  issue  of  circula- 
tion to  any  bank  was  restricted  to  ninety  per  centum  of  the 
paid-in  capital  of  the  association. 

The  issue  of  circulating  notes  of  the  denomination  of  five  dol- 
lars was  restricted  by  this  Act  to  an  amount  not  exceeding  one- 
third  of  the  outstanding  circulation  of  each  bank,  and  so  much  of 
the  Act  approved  July  12,  1882,  as  prohibited  any  national  bank 
from  increasing  its  circulation  within  six  months  after  the  circu- 
lation had  been  reduced,  was  repealed,  thus  adding  an  element  of 
flexibility  to  the  currency  issues. 

This  Act  also  authorized  the  Secretary  of  the  Treasury  to 
receive  United  States  notes  on  deposit,  without  interest,  from  any 
national  banking  association,  in  sums  of  not  less  than  ten  thou- 
sand dollars  and  to  issue  certificates  therefor  in  denominations  of 
not  less  than  five  thousand  dollars.  Such  certificates  were  author- 
ized to  be  counted  as  lawful  money  reserve  and  to  be  accepted  for 


242  ROMANCE  AND  TRAGEDY  OF  BANKING 

Clearing  House  balances  at  the  places  where  the  deposits  therefor 
were  made. 

In  anticipation  of  the  passage  of  this  Act,  and  while  it  was 
still  pending  before  Congress,  approximately  one  thousand  appli- 
cations for  authority  to  organize  national  banks  with  a  capital  of 
less  than  fifty  thousand  dollars  were  filed  with  the  Comptroller  of 
the  Currency,  showing  the  popularity  of  this  measure,  as  afford- 
ing national  banking  facilities  to  small  communities,  and  between 
the  date  of  the  passage  of  the  Act  and  October  31,  1900,  the  close 
of  the  last  report  year  of  Mr.  Dawes'  administration,  three  hun- 
dred and  eighty-two  banks  of  this  class  were  chartered. 


WILLIAM  B.  RIDGELY 
Comptroller  of  the  Currency,  190 1- 1908 


CHAPTER  XIII 

William  B.  Ridgely 

WILLIAM  B.  RIDGELY,  of  Illinois,  the  eleventh  Comp- 
troller of  the  Currency,  was  appointed  by  President 
Roosevelt,  to  succeed  Charles  G.  Dawes,  October  1, 1901, 
and  served  a  period  of  six  years  and  six  months,  having  been  re- 
appointed at  the  expiration  of  his  first  term.  He  resigned 
March  30,  1908. 

Mr.  Ridgely  was  born  in  Springfield,  111.,  July  19,  1858.  Sev- 
eral generations  of  his  ancestors  were  bankers.  His  grandfather, 
Nicholas  Ridgely,  was  emploj'ed  in  the  St.  Louis  branch  of  the 
Bank  of  the  United  States,  and  afterward  organized  the  Ridgely 
National  Bank  of  Springfield.  His  father,  Charles  Ridgely,  was 
also  a  banker  and  was  president  of  the  Ridgely  National  Bank, 
in  which  the  former  Comptroller  obtained  his  early  banking 
experience. 

Mr.  Ridgely  attended  the  Rensselaer  Polytechnic  Institute  at 
Troy,  N.  Y.,  for  several  years,  taking  a  degree  of  Civil  Engineer 
in  1879.  Subsequently  he  engaged  in  mining,  manufacturing  and 
banking  in  Springfield,  particularly  in  the  coal  and  iron  indus- 
tries, and  was  vice-president  of  the  Ridgely  National  Bank. 

He  was  postmaster  at  Springfield  from  April  13,  1897,  to 
June  15,  1899.  He  was  elected  secretary  and  vice-president  of 
the  Republic  Iron  and  Steel  Company  and  removed  to  Chicago. 

He  resigned  as  Comptroller  to  accept  the  presidency  of  the 
National  Bank  of  Commerce  of  Kansas  City,  Mo.  This  bank 
failed  and  was  placed  in  the  hands  of  a  receiver  December  5,  1907. 
It  was  subsequently  restored  to  solvency  by  its  directors  and  prin- 
cipal stockholders,  and  after  reorganization  of  the  board  of  direc- 
tors, was  allowed  to  resume  business  March  30,  1908,  with  Mr. 
Ridgely  as  president.  Mr.  Ridgely  resigned  the  presidency  of  this 
bank  in  November,  1909,  and  returned  East  to  look  after  his 
private  business  interests.     He  was  also  connected  with  several 

243 


244  ROMANCE  AND  TRAGEDY  OF  BANKING 

manufacturing  enterprises.     He  died  at  the  Baltimore  Protestant 
Infirmary  on  May  1,  1920,  after  undergoing  an  operation. 

Extension  of  the  Corporate  Existence  of  National  Banks 

When  Mr.  Ridgely  assumed  charge  of  the  Currency  Bureau, 
the  first  matter  of  special  importance  to  engage  his  attention  was 
the  question  of  the  second  extension  of  the  corporate  existence  of 
national  banking  associations. 

The  original  Bank  Act  of  February  25,  1863,  provided  for  a 
period  of  succession  for  only  twenty  years  from  the  date  of  ap- 
proval of  the  Act.  Under  this  Act  four  hundred  and  eighty-eight 
national  banks  were  organized  for  a  period  of  nineteen  years  only. 
Had  this  provision  of  law  continued  in  force,  the  banks  would 
have  been  chartered  for  periods  of  shorter  duration  each  as  time 
progressed,  and  the  national  banking  system  would  have  termi- 
nated by  limitation  in  1883,  the  end  of  the  twenty-year  period 
from  the  date  of  passage  of  the  original  Act.  But  the  Act  of  Feb- 
ruary 25,  1863,  was  repealed  by  the  Act  of  June  3,  1864.  The 
latter  Act  recognized  and  corrected  this  incongruity  in  the  origi- 
nal enactment  by  changing  this  provision  of  law  so  as  to  make  the 
period  of  succession  of  a  bank  twenty  years  from  the  date  of  exe- 
cution of  the  organization  certificate,  thus  placing  all  banks,  no 
matter  when  organized,  on  an  equal  footing  as  to  the  duration  of 
their  existence. 

Of  the  four  hundred  and  eighty-eight  banks  that  were  organ- 
ized under  the  Act  of  February  25,  1863,  one  hundred  and  fifty- 
one  were  placed  in  liquidation  by  their  stockholders,  twenty-one 
went  out  of  existence  by  reason  of  the  expiration  of  their  charters, 
thirty-five  were  closed  because  of  insolvenc}^  one  failed  to  com- 
plete its  organization,  and  the  charters  of  two  hundred  and  eighty 
were  extended  for  a  further  period  of  twenty  years  under  the  Act 
of  July  12,  1882,  which  authorized  such  extension. 

The  first  of  the  extended  charters  granted  under  the  Act  of 
July  12,  1882,  expired  July  12,  1902,  and  when  Mr.  Ridgely 
assumed  charge  of  the  Currency  Bureau  there  was  no  authority 
of  law  to  extend  the  charter  of  a  bank  the  second  time,  or  at  least 
there  was  such  grave  doubt  as  to  whether  a  second  extension  was 


ROMANCE  AND  TRAGEDY  OF  BANKING  245 

authorized  by  the  Act  of  July  12,  1882,  that  legislation  was 
deemed  necessary  or  advisable.  Mr.  Ridgely  therefore  recom- 
mended and  secured  the  passage  of  the  Act  of  April  12,  1902, 
authorizing  a  further  extension  for  the  period  of  twenty  years, 
and  thus  avoided  the  enforced  liquidation  at  the  termination  of 
their  second  twenty-year  period  of  a  large  number  of  banks  and 
their  reorganization  into  new  associations  if  they  desired  to  con- 
tinue in  the  national  system. 

Rohhery  of  the  Merchants  National  Bank  of  Lowell,  Mass. 

On  October  17.,  1901,  the  largest  bank  robbery  recorded  in  the 
annals  of  the  national  banking  system  occurred  at  the  Merchants 
National  Bank  of  Lowell,  Mass. 

The  capital  stock  of  this  association  was  $400,000,  its  surplus 
and  undivided  profits  over  $300,000,  and  its  total  liabilities  over 
$1,500,000.  The  bank  was  one  of  the  oldest  national  associations 
in  the  State  of  Massachusetts,  its  charter  number  being  506. 

It  appears  from  the  history  of  the  robbery  that  for  a  year 
or  more  before  it  occurred,  Albert  G.  Smith,  the  teller,  who  had 
been  employed  in  the  bank  for  about  eight  years,  and  Lewis  K. 
Swift,  a  bookkeeper,  who  had  also  been  in  the  service  of  the  bank 
for  a  number  of  years,  conceived  the  idea  of  getting  rich  quickly 
through  the  temporary  use  of  the  bank's  funds  in  stock  specula- 
tions. These  two  employees  entered  into  a  conspiracy  to  extract 
from  the  funds  of  the  association  an  amount  of  money  sufficient 
to  enable  them  to  purchase  the  stock  of  a  certain  corporation 
which  they  had  reason  to  believe  would  materially  enhance  in  value 
in  a  short  time  and  enable  them  to  pay  back  the  money  abstracted 
from  the  bank  and  realize  a  handsome  profit  for  themselves,  with- 
out detection  by  the  bank's  officers  or  the  bank  examiner.  Their 
method  of  abstraction  of  the  money  and  concealment  of  the  short- 
age was  as  follows : 

They  were  well  acquainted  with  all  of  the  depositors  in  the 
bank  and  their  business  dealings  with  the  institution,  and  selected 
with  care  the  particular  accounts  which  they  determined  to 
manipulate.  When  a  depositor  who  carried  a  considerable  bal- 
ance made  a  deposit  the  teller  would  credit  the  full  amount  of  such 


246  ROMANCE  AND  TRAGEDY  OF  BANKING 

deposit  in  the  pass  book  of  the  depositor  in  the  customary  way, 
and  pass  the  deposit  slip  to  his  confederate,  the  bookkeeper,  who 
would  enter  one-half  of  the  amount  to  the  credit  of  the  depositor 
in  the  individual  ledger  and  appropriate  the  balance  for  the  use 
of  himself  and  the  teller. 

This  method  of  embezzlement  was  carried  on  for  some  time, 
until  they  accumulated  sufficient  funds  to  make  the  purchase  of 
the  stock  they  desired.  The  shortage  was,  of  course,  concealed 
by  false  entries  in  the  books  of  the  bank,  as  it  was  impossible 
either  for  the  officers  of  the  bank  or  the  bank  examiner  to  detect 
the  shortage  except  by  comparison  of  the  manipulated  accounts 
with  the  passbooks  in  the  hands  of  the  depositors  whose  funds 
were  embezzled. 

They  invested  the  proceeds  of  their  peculations  in  the  partic- 
ular stock  they  desired  to  acquire,  but  instead  of  the  stock  ad- 
vancing in  price,  as  they  had  anticipated,  it  immediately 
depreciated  in  value,  and  they  were  compelled  to  use  more  of  the 
bank's  funds  by  the  same  procedure  to  make  good  the  margin 
required  to  protect  their  investment.  This  process  continued  until 
their  losses  became  so  large  that  their  only  hope  was  to  go  into 
the  market  and  speculate  in  stocks  generally.  They  continued  to 
use  the  bank's  funds  until  the  total  sum  of  their  abstractions 
amounted  to  over  one  hundred  thousand  dollars,  all  of  which  was 
invested  in  the  purchase  of  stocks. 

For  a  time  they  were  successful  in  their  speculations,  and  at 
one  time  recovered  the  entire  losses  that  they  had  previously  sus- 
tained to  within  two  or  three  thousand  dollars.  But  immediately 
preceding  the  phenomenal  advance  in  stocks  occasiond  by  the  cor- 
ner effected  in  the  stocks  of  the  Northern  Pacific  Railroad  Com- 
pany, they  had  disposed  of  their  holdings  of  that  stock  short  to  a 
considerable  extent,  which  caused  their  losses  to  again  reach 
nearly  one  hundred  thousand  dollars. 

About  this  time  a  dispute  arose  in  the  bank  between  a  depos- 
itor and  the  assistant  cashier  in  regard  to  an  apparent  overdraft 
in  the  account  of  the  former,  which  was  heard  b}'  one  of  the  em- 
bezzlers, and  knowing  that  an  investigation  of  this  particular 
account  would  follow  and  lead  to  a  discovery  of  the  shortage,  as 
this  was  one  of  the  accounts  that  had  been  manipulated,  he  noti- 


ROMANCE  AND  TRAGEDY  OF  BANKING  247 

fied  his  partner  in  crime,  who  was  absent  on  vacation,  and  urged 
him  to  return  to  Lowell  at  once,  which  he  did,  and  after  a  confer- 
ence over  the  situation  they  determined  to  rob  the  bank  of  all  the 
funds  and  securities  they  could  obtain  and  make  away  with  them. 
Accordingly,  between  the  hours  of  ten  and  eleven  o'clock  on  the 
night  the  robbery  occurred  they  gained  access  to  the  bank  and 
stole  between  twenty-two  and  twenty-three  hundred  thousand  dol- 
lars in  cash  and  securities  and  immediately  left  for  Boston,  a  dis- 
tance of  only  twenty-five  miles,  where  they  placed  their  plunder 
in  the  hands  of  other  parties  for  safe-keeping. 

On  the  following  morning  they  consulted  and  engaged  counsel 
in  Boston  to  advise  them  what  they  should  do,  and  through  this 
counsel  secured  the  services  of  a  prominent  attorney  at  Lowell 
with  a  view  to  opening  negotiations  with  the  bank's  officers  and 
making  the  best  terms  of  settlement  possible  as  a  condition  prece- 
dent to  the  return  of  the  stolen  assets. 

When  the  national  bank  examiner  commenced  an  examina- 
tion on  the  morning  following  the  robbery,  he  having  been  sum- 
moned to  the  bank  by  its  officers,  he  found  a  very  serious  condition 
of  affairs.  All  of  the  cash,  notes,  collateral  and  securities  were 
missing  and  the  bank  had  been  completely  looted  and  stripped  of 
everything. 

If  the  property  had  not  been  recovered  the  bank  would  have 
been  hopelessly  insolvent,  and  had  the  real  condition  of  affairs 
been  known  at  the  time,  public  confidence  in  Lowell  and  vicinity 
would  have  been  badly  shaken  and  a  serious  disturbance  would  no 
doubt  have  resulted.  The  counsel  for  the  absconding  teller  and 
bookkeeper,  however,  immediately  opened  negotiations  with  the 
officers  of  the  bank  for  the  return  of  the  stolen  property,  and 
plans  were  discussed  for  making  the  bank  solvent  if  the  assets 
were  not  recovered.  In  the  meantime  the  teller  and  bookkeeper 
remained  in  hiding  in  the  vicinity  of  Boston. 

After  various  consultations  by  the  directors  by  telephone  with 
the  attorneys  for  the  culprits,  a  meeting  between  the  attorneys 
and  a  committee  composed  of  two  directors  of  the  bank  was 
arranged  for  and  held.  The  robbery  occurred  on  Thursday  night, 
and  this  meeting  was  held  shortly  before  midnight  on  the  Sunday 
following,  at  which  an  arrangement  was  made  for  the  return  of 


248  ROMANCE  AND  TRAGEDY  OF  BANKING 

all  the  property  of  the  bank,  less  a  certain  sum  withheld  for  ser- 
vices and  expenses,  and  between  one  and  two  o'clock  on  Monday 
morning  one  of  the  attorneys  for  the  robbers  delivered  at  the  bank 
all  of  the  cash  and  securities  that  had  been  taken,  which,  after 
being  counted  and  examined  by  the  bank  examiner  and  some  of 
the  officers  of  the  bank,  were  found  to  be  intact,  except  about  a 
thousand  dollars  in  cash,  which  is  supposed  to  have  been  used  in 
expenses  of  counsel. 

In  justice  to  the  attorneys  for  the  culprits,  it  should  be  stated 
that  at  the  very  outset  they  informed  their  clients  that  they 
would  accept  employment  only  upon  the  condition  that  they  would 
agree  to  return  every  dollar  of  the  bank's  property  in  their  pos- 
session, otherwise  they  would  have  nothing  to  do  with  the  case. 
They  agreed  to  do  this,  whereupon  the  stolen  property  was  sur- 
rendered to  the  attorneys,  and  by  them  returned  to  the  bank. 

No  promises  of  immunity  from  punishment  were  made  by  the 
directors  of  the  bank  as  a  condition  precedent  to  the  return  of 
the  property,  notwithstanding  the  statements  published  in  the 
newspapers  at  the  time  to  the  contrary,  and  if  any  had  been  made 
they  would  have  been  of  no  avail,  as  the  examiner  who  had  infor- 
mation of  the  robbery  would  have  reported  the  facts  to  the  United 
States  Attorney  for  action,  as  is  done  in  every  case  of  dishonesty 
or  criminal  violation  of  the  banking  laws  which  comes  to  the 
attention  of  examiners. 

The  embezzlers  knew  this,  and  they  also  knew  that  there  was 
no  possibility  of  escaping  with  their  plunder,  so  they  finally  con- 
sented to  surrender  it.  They  ^ere  also  advised  by  their  counsel 
to  surrender  themselves  and  take  the  consequences  of  their  acts, 
and  their  counsel  offered  to  defend  them  on  trial,  but  this  they 
declined  to  do. 

As  soon  as  the  stolen  assets  were  recovered  and  the  bank's 
affairs  Avere  found  to  be  in  a  satisfactory  condition,  the  bank 
examiner  reported  all  the  facts  to  the  United  States  Attorney  at 
Boston,  and  although  Pinkerton  detectives  were  placed  on  the 
trail  of  the  robbers  they  never  were  captured.  It  was  currently 
reported  at  the  time  that  they  succeeded  in  escaping  from  this 
country  and  had  gone  to  South  America,  or  some  other  country 


ROMANCE  AND  TRAGEDY  OF  BANKING  249 

with  which  the  United  States  had  no  extradition  treaty  covering 
their  offense. 

It  was  the  generally  accepted  theory  that  the  motive  of  the 
teller  and  bookkeeper  in  stealing  the  assets  of  the  bank  in  bulk 
was  to  compel  the  bank's  officers  to  settle  with  them  on  the  most 
favorable  terms  for  their  previous  embezzlements,  and  that  this 
desperate  measure  was  suggested  by  an  occurrence  of  a  similar 
nature  on  a  smaller  scale  more  than  twenty  years  previously  in 
the  same  section  of  the  country. 

While  the  business  of  the  bank  proceeded  as  usual  without  in- 
terruption, on  January  4,  1902,  the  association  was  placed  in 
voluntary  liquidation  by  a  vote  of  its  stockholders  and  with  two 
other  banks  was  merged  into  the  Union  National  Bank  of  Lowell, 
which  bank  commenced  business  on  January  6,  1902. 

The  Baltimore  and  San  Francisco  Fires 

The  great  conflagrations  in  Baltimore  and  San  Francisco, 
which  completely  destroyed  millions  of  dollars  of  banking  prop- 
erty and  devastated  the  principal  business  sections  of  those  cities, 
occurred  during  the  administration  of  Mr.  Ridgely. 

The  Baltimore  fire  started  on  Sunday  morning,  February  7, 
1904,  between  the  hours  of  ten  and  eleven  o'clock.  It  originated 
in  the  warehouse  of  the  John  E.  Hurst  Company,  at  the  corner 
of  German  and  Sharp  streets,  and  was  immediately  followed  by 
a  succession  of  explosions,  causing  the  flames  to  rapidly  extend 
to  adjoining  buildings.  A  strong  wind  was  blowing  at  the  time, 
and  within  an  hour  or  two  a  dozen  buildings  were  involved,  and 
the  fire  continued  to  advance  to  the  north  and  east,  destroying 
everything  in  its  path  and  increasing  in  intensity  until  at  sun- 
down eight  or  ten  entire  blocks  were  in  flames  or  in  ruins.  Early 
on  Monday  night  the  wind  shifted  in  the  opposite  direction,  carry- 
ing the  flames  toward  the  waterfront.  Dynamite  was  freely  used 
in  an  effort  to  stay  its  progress,  but  without  effect.  Fire  engines 
were  sent  from  Washington,  Philadelphia,  Harrisburg,  New  York 
and  other  nearby  cities,  but  notwithstanding  this  assistance  the 
fire  continued  to  burn  with  ferocity  until  Sunday  night,  when 
everything  was  consumed  to  the  waterfront  of  the  inner  harbor. 


250  ROMANCE  AND  TRAGEDY  OF  BANKING 

Early  on  Monday  morning  the  Governor  of  the  State,  by 
proclamation,  declared  a  legal  holiday,  extending  from  Febru- 
ary 8  to  February  22,  in  order  to  protect  maturing  paper  and 
afford  the  banks  an  opportunity  to  secure  temporary  quarters 
and  resume  business.  The  buildings  of  twenty  banks  and  trust 
companies  were  completely  destroj'ed,  and  for  a  number  of  days 
the  greatest  anxiety  prevailed  in  regard  to  the  safety  of  the  cash 
and  securities  stored  in  their  overheated  vaults,  twelve  of  which 
were  known  to  contain  eighty  or  ninety  millions  of  dollars  in  loans 
and  discounts,  securities  of  various  kinds,  clearing  house  ex- 
changes, and  cash.  Fortunately,  however,  these  vaults  stood  the 
test  of  the  fire,  and  when  they  were  opened,  after  being  allowed  to 
cool,  their  contents  were  found  to  be  well  preserved.  While  many 
of  the  banks  lost  their  records  in  whole  or  in  part,  there  was  not 
a  single  instance  of  loss  of  securities  or  cash,  and  when  business 
was  formally  resumed  on  February  23d,  nearly  all  matured  paper, 
checks  and  drafts  were  honored  when  presented  for  payment. 
None  of  the  banks  suspended  as  a  result  of  the  fire,  and  business 
was  not  even  interrupted,  except  during  the  progress  of  the  fire, 
the  banks  having  secured  temporary  quarters  in  other  sections  of 
the  city. 

The  total  value  of  the  property  destroyed  by  this  conflagra- 
tion has  been  estimated  at  between  one  hundred  and  twenty-five 
and  one  hundred  and  fifty  millions  of  dollars.  The  total  value  of 
the  banking  houses  and  furniture  and  fixtures  of  the  ten  national 
banks  whose  buildings  were  destroyed,  as  shown  by  their  last 
report  of  condition  made  to  the  Comptroller  of  the  Currency  im- 
mediately before  the  fire,  was  two  millions,  two  hundred  and 
twenty-one  thousand,  nine  hundred  and  eighty  dollars.  Their  net 
loss  over  and  above  insurance  has  not  been  stated. 

On  the  morning  of  April  18,  1906,  as  the  result  of  a  severe 
earthquake,  fire  broke  out  simultaneously  in  several  widely  separ- 
ated sections  of  San  Francisco,  and  owing  to  the  breaking  of  the 
Spring  Valley  Water  Company's  mains,  there  was  no  water  sup- 
ply with  which  to  combat  the  flames.  Dynamite  was  used  in  an 
effort  to  check  the  spread  of  the  fire,  but  with  little  or  no  effect. 
Every  banking  house  in  San  Francisco  was  practically  destroyed, 
with  the  exception  of  the  Columbia  Savings  and  Loan  Society,  an 


ROIVIANCE  AND  TRAGEDY  OF  BANKING  251 

institution  which  did  not  transact  a  commercial  business,  and  the 
Market  Street  Bank,  a  small  institution,  whose  premises  were 
damaged  but  not  destroyed. 

The  direct  fire  losses  to  the  banks  consisted  of  their  furniture 
and  fixtures,  and  the  banking  houses  of  such  institutions  as  owned 
their  buildings.  The  indirect  losses  through  loans  never  have 
been  made  public. 

The  fire  raged  fiercely  for  about  three  days,  and  when  it  was 
finally  brought  under  control  an  informal  meeting  of  the  bankers 
and  representatives  of  financial  interests  was  held  and  arrange- 
ments were  made  for  the  protection  of  bank  vaults  and  their  con- 
tents and  for  continuing  legal  holidays  by  proclamation  of  the 
Governor  as  long  as  the  emergency  made  it  desirable  or  necessary. 
The  clearing  house  association  appointed  an  emergency  finance 
committee  and  arranged  for  advancing  to  depositors  in  the  banks 
limited  amounts  on  account  to  enable  them  to  meet  their  personal 
needs.  Quarters  were  provided  for  the  clearing  house  banks  at 
the  United  States  Mint  and  a  manager  for  the  banks  was  ap- 
pointed. A  number  of  banks  opened  accounts  with  the  Clearing 
House  Bank  by  depositing  cash  against  which  they  issued  orders 
in  favor  of  their  depositors  who  applied  for  small  advances.  These 
advances  were  made  in  the  form  of  promissory  notes.  Practically 
during  the  whole  period  that  the  Clearing  House  Bank  was  in 
operation  most  of  the  banks  had  no  available  records  showing  the 
amounts  due  their  respective  depositors,  their  books  being  locked 
up  in  their  overheated  vaults. 

In  the  meantime  the  banks  had  made  or  were  making  arrange- 
ments for  office  accommodations  in  private  residences  in  the  west- 
ern quarter  of  the  city  and  were  doing  the  best  they  could  in  the 
way  of  handling  business  until  some  permanent  order  could  be 
established.  They  were  without  books,  stationery  or  other  sup- 
plies. Everything  of  that  nature  that  had  not  been  destroyed  by 
the  fire  was  locked  in  their  vaults,  which  could  not  be  opened  for 
several  weeks,  and  it  was  some  time  subsequent  to  the  regular 
resumption  of  business  before  many  of  the  banks  were  able  to 
accuratelv  adjust  their  accounts. 

At  a  meeting  of  the  Clearing  House  Association  on  May  16, 
it  having  been  ascertained  that  nearly  all  the  banks  had  gained 


252  ROMANCE  AND  TRAGEDY  OF  BANKING 

access  to  their  vaults,  it  was  determined  that  business  could  be 
safely  resumed  on  May  23d,  and  it  was  so  ordered,  and  all  the 
banks  regularly  reopened  on  that  date. 

As  an  instance  of  the  precaution  taken  by  some  of  the  banks 
to  safeguard  their  assets,  when  the  fire  approached  dangerously 
near  the  Crocker  National  Bank,  and  building  after  building  had 
been  consumed,  the  coin  vault  was  thrown  open  and  a  score  of 
clerks  hurriedly  stacked  the  coin  in  trays  and  loaded  it  on  coin 
trucks  with  a  haste  accelerated  by  the  information  received  that 
dynamiting  was  to  commence  in  the  immediate  vicinity.  All  the 
securities  of  the  bank,  books  of  account,  current  statements,  de- 
posit slips  and  checks  for  April  17th,  were  loaded  on  a  dray  and 
hauled  to  the  St.  Francis  Hotel,  which  at  that  time  was  thought 
to  be  out  of  the  danger  zone,  and  were  carried  to  a  room  on  the 
second  floor,  where  they  were  placed  under  guard  made  up  of  the 
officers  and  clerks  of  the  bank,  who  relieved  each  other  in  shifts. 
Toward  midnight  of  the  same  day  the  fire  reached  the  block  on 
which  the  hotel  was  located,  making  it  necessary  to  again  move 
the  bank's  valuables  to  safer  quarters.  They  were  then  removed, 
part  of  the  way  on  wheelbarrows,  to  the  home  of  one  of  the  officers 
of  the  bank  in  the  western  addition,  a  section  not  reached  by  the 
fire,  and  were  stored  in  the  basement  of  his  house,  where  they 
remained  over  night  and  part  of  the  next  day,  when  they  were 
packed  in  trunks  and  chests  and  conveyed  to  the  wharf  at  Fort 
Mason,  where  they  were  placed  on  a  Government  tug  stationed 
there  and  subsequently  transferred  to  the  safe  deposit  vaults  of 
the  bank,  where  all  the  appointments  were  intact. 

The  Chicago  National  Bank 

What  might  have  proved  a  very  disastrous  failure  in  Decem- 
ber, 1905,  was  averted  by  the  wise  and  timely  course  of  Mr. 
Ridgely,  with  the  co-operation  of  the  associated  banks  in  Chicago. 
The  Chicago  National  Bank,  of  which  John  R.  Walsh  was  presi- 
dent, was  discovered  to  be  in  a  very  precarious  condition,  because 
of  large  loans  made  by  Walsh  to  various  concerns  with  which  he 
was  identified  and  which  he  either  owned  or  controlled. 


ROMANCE  AND  TRAGEDY  OF  BANKING  253 

This  bank  had  a  capital  stock  of  $1,000,000,  surplus  of 
$1,457,000,  and  deposits  of  $20,000,000.  The  bank  had  been  the 
subject  of  the  Comptroller's  special  attention  for  about  two  years 
previous  to  its  suspension.  Mr.  Walsh  was  reputed  to  be  worth 
several  millions  of  dollars.  He  was  identified  with  numerous  enter- 
prises, some  of  which  were  on  a  large  scale.  He  had  been  a  suc- 
cessful business  man  and  had  raised  himself  from  obscurity  to  a 
position  of  financial  affluence.  While  the  aggregate  of  the  loans 
by  the  bank  to  the  Walsh  enterprises  amounted  to  a  very  large 
part  of  the  total  deposits,  and  more  than  double  the  amount  of 
the  capital  and  surplus  of  the  association,  these  loans  were  dis- 
tributed among  a  number  of  different  concerns,  each  of  which  was 
engaged  in  a  different  line  of  business.  In  the  Walsh  combination 
there  were  three  railroads,  three  gas  companies,  a  large  news- 
paper, a  stone  quarry,  a  coal  company  and  other  enterprises  of 
greater  or  less  magnitude. 

While  all  of  these  concerns  were  affiliated  and  in  the  hands  of 
the  same  interest,  they  were  separate  corporations,  and  as  such 
were  entitled  under  the  law  to  receive  a  loan  each  equal  to  ten  per 
cent,  of  the  capital  of  the  bank.  Some  of  these  loans  exceeded  the 
legal  limit  and  were  required  by  the  Comptroller  to  be  reduced, 
but  none  of  them  were  regarded  as  dangerous  or  unsafe,  except 
in  the  hazard  attending  the  concentration  of  such  a  large  amount 
of  the  bank's  funds  in  the  hands  of  interests  so  closely  interwoven 
as  were  these  several  corporations.  Notwithstanding  this  fact, 
there  seemed  to  be  every  reason  to  believe  that  each  corporation 
of  the  group  would  be  carried  to  a  successful  outcome,  and  not 
only  pay  all  its  debts  but  leave  a  very  substantial  profit  to  Mr. 
Walsh  and  those  associated  with  him. 

In  addition  to  the  national  bank,  Mr.  Walsh  controlled  to  a 
large  extent  two  other  banking  corporations  in  Chicago,  the 
Equitable  Trust  Company  and  the  Home  Savings  Bank. 

In  June,  1905,  the  Comptroller,  through  the  national  bank 
examiner,  endeavored  to  arrange  with  the  State  bank  authorities 
of  Illinois,  a  simultaneous  examination  of  these  three  banking 
institutions,  with  a  view  to  ascertaining  the  aggregate  liabilities 
of  Walsh  and  his  several  corporations  and  interests  to  the  three 
concerns,  as  it  was  suspected  that  the  national  bank  was  really 


254  ROMANCE  AND  TRAGEDY  OF  BANKING 

in  a  worse  condition  than  it  appeared  to  be,  but  this  effort  to 
secure  the  co-operation  of  the  State  Banking  Department  failed, 
and  the  national  bank  had  to  be  examined  independently  as  usual. 
This  examination  developed  no  material  improvement  in  the  sit- 
uation. While  some  of  the  loans  that  had  been  previously  criti- 
cised and  required  to  be  reduced  had  been  curtailed,  others  had 
taken  their  place,  and  at  that  time  the  total  loans  of  the  national 
bank  to  the  several  Walsh  corporations  amounted  to  over 
$6,800,000,  while  some  of  the  loans  had  been  shifted  to  the  bond 
account. 

The  condition  disclosed  by  this  examination  convinced  the 
Comptroller  that  it  was  absolutely  necessary  to  secure  a  simul- 
taneous examination  of  the  three  institutions  before  the  real  con- 
dition of  the  national  bank  could  be  determined,  and  negotiations 
were  again  opened  with  the  State  Banking  Department  to  that 
end,  and  an  arrangement  finally  effected  for  an  examination  of 
the  three  banks  on  December  9,  1905. 

It  was  thought  that  this  joint  examination  would  disclose 
transfers  of  cash  or  securities  from  the  State  to  the  national  bank 
at  the  time  of  the  previous  examination  of  the  latter,  and  vice 
versa,  at  the  time  of  the  examination  of  the  State  institutions,  but 
such  did  not  prove  to  be  the  case.  No  shortage  of  cash  or  securi- 
ties in  either  institution  was  disclosed,  nor  anyhing  to  indicate 
any  manipulation  of  the  assets  or  accounts,  or  any  false  entries. 

Aside  from  the  large  amount  of  loans  made  by  the  Chicago 
National  Bank  to  the  Walsh  concerns,  the  bank  seemed  to  be  well 
managed,  its  other  loans  carefully'  and  conservatively  made,  and 
its  books  and  accounts  accurately  and  well  kept,  always  reflecting 
the  true  condition  of  the  association. 

The  simultaneous  examination  of  the  three  banks,  however, 
developed  the  fact,  as  was  suspected,  that  in  addition  to  the  large 
loans  by  the  Chicago  National  Bank  to  the  Walsh  interests,  loans 
had  been  made  by  the  Home  Savings  Bank  and  the  Equitable 
Trust  Company  to  the  same  interests  to  an  amount  greater  in 
proportion  to  their  capital  stock  and  deposits  than  the  loans  made 
by  the  national  bank,  and  the  aggregate  of  the  loans  made  by  the 
three  institutions  amounted  to  between  fifteen  and  sixteen  millions 
of  dollars.    The  Home  Savings  Bank,  which  had  about  $4.,272,000 


ROMANCE  AND  TRAGEDY  OF  BANKING  255 

of  deposits,  had  $3,836,000  of  these  loans,  and  the  Equitable 
Trust  Company,  with  deposits  amounting  to  $-1,805,000,  had  over 
$4,250,000  of  them. 

This  knowledge  of  the  total  liabilities  of  the  Walsh  interests, 
acquired  through  this  joint  examination  of  the  three  banks,  made 
the  situation  much  more  critical  and  demanded  immediate  and 
decisive  action  on  the  part  of  the  Comptroller. 

If  the  amount  of  the  indebtedness  to  the  Chicago  National 
Bank  alone  had  represented  anything  like  the  total  liabilities  of 
the  Walsh  concerns,  there  would  have  been  reasonable  probability 
of  Mr.  Walsh  being  able  to  continue  the  sale  of  the  bonds  of  his 
corporations  and  from  the  proceeds  of  such  sales  pay  his  liabili- 
ties to  the  bank.  But  with  the  increased  amount  of  these  liabili- 
ties, as  shown  by  the  examination  of  the  three  institutions,  and 
with  practically  all  of  the  funds  of  the  two  State  banks  loaned  to 
the  Walsh  enterprises,  any  sudden  demand  made  upon  the  State 
banks  by  their  depositors  would  have  necessitated  their  being  sup- 
plied with  funds  by  the  national  association,  as  the  Equitable 
Trust  Company  had  only  about  five  thousand  five  hundred  dollars 
and  the  Home  Savings  Bank  about  twelve  thousand  dollars  in  cash 
at  the  time  of  their  examination,  but  they  had  on  deposit  with  the 
Chicago  National  Bank  fifty-four  thousand  dollars  and  one  hun- 
dred and  twenty-nine  thousand  dollars  respectively. 

At  this  stage  of  the  situation,  the  State  authorities  were  un- 
willing to  allow  the  State  banks  to  continue  doing  business,  unless 
something  was  done  to  strengthen  their  financial  condition,  and 
the  Comptroller  did  not  deem  it  safe  to  permit  the  national  bank 
to  open  for  business  on  Monday  morning,  with  the  certainty  that 
it  would  meet  with  trouble,  if  either  of  the  State  institutions 
became  involved,  or  a  run  was  started  upon  them  by  their 
depositors. 

This  was  the  condition  of  affairs  which  existed  on  Thursday, 
December  14,  1905,  and  the  Comptroller,  after  a  conference  with 
the  bank  examiner  by  telephone,  instructed  him  to  take  no  action 
until  after  the  close  of  business  at  noon  on  the  following  Satur- 
day, when  the  time  locks  had  been  set  on  the  vaults  to  prevent 
their  being  opened  before  Monday  morning,  then  to  call  a  meeting 


256  ROMANCE  AND  TRAGEDY  OF  BANI^ING 

of  the  Clearing  House  Association  and  advise  them  of  the  situa- 
tion. In  the  meantime,  the  Comptroller  left  Washington  for  Chi- 
cago, so  as  to  direct  matters  at  close  range.  He  arrived  in 
Chicago  on  Sunday,  December  17,  and  arranged  at  once  for  a 
conference  with  Mr.  Walsh  and  the  directors  of  his  bank,  at  which 
there  were  also  present  the  attorneys  for  the  Clearing  House 
Association  and  the  National  and  State  bank  examiners.  This 
conference  lasted  from  ten  o'clock  Sunday  morning  through  the 
night  until  seven  o'clock  on  Monday  morning. 

At  the  beginning  of  the  conference  the  Comptroller  announced 
his  determination  not  to  permit  the  national  bank  to  open  for 
business  on  Monday  morning  unless  some  satisfactory  arrange- 
ment was  made  to  insure  the  payment  in  full  of  all  demands  that 
might  be  made  by  the  creditors  upon  the  bank. 

This  conference  resulted  in  an  agreement  in  writing  between 
the  Chicago  National  Bank  and  the  Clearing  House  Association, 
representing  thirty-three  Chicago  banks,  under  the  terms  of  which 
the  latter  banks  purchased  from  the  Chicago  National  Bank  all 
of  its  assets,  except  cash  and  exchange,  partially  securing  them- 
selves by  obtaining  the  guarantee  of  the  directors  of  the  Chicago 
National  Bank  to  the  extent  of  their  individual  resources. 

The  First  Trust  and  Savings  Bank  of  Chicago  was  appointed 
by  the  associated  banks  agent  to  receive  and  liquidate  the  pur- 
chased assets,  under  the  direction  and  approval  of  the  Chicago 
Clearing  House  Committee. 

This  arrangement  was  entered  into  only  after  a  long  and  con- 
tinued discussion.  A  representative  of  every  bank  in  Chicago, 
which  was  a  member  of  the  Clearing  House  Association,  was  pres- 
ent at  the  meeting.  The  Comptroller  did  not  attempt  to  dictate 
any  of  the  provisions  of  the  agreement,  or  to  impose  any  condi- 
tions, except  to  insist  that  the  creditors  of  the  Chicago  National 
Bank  must  be  fully  protected,  otherwise  he  would  place  the  asso- 
ciation in  the  hands  of  a  receiver  on  Monday  morning. 

The  First  Trust  and  Savings  Bank  continued  to  act  as  agent 
for  the  clearing  house  banks  under  this  agreement  until  some 
time  in  1907,  when  it  was  considered  advisable  to  sell  to  John  R. 
Walsh  and  Company,  certain  of  the  railroad  and  other  securities 


ROMANCE  AND  TRAGEDY  OP  BANKING  257 

to  facilitate  their  liquidation,  the  consideration  being  the  prom- 
issor}'  note  of  Walsh  and  Company,  secured  by  the  assets  pur- 
chased and  the  guarantee  of  the  directors  of  the  Chicago  National 
Bank.  The  assets  not  sold  to  Walsh  and  Conipan}-,  under  this 
agreement,  were  retained  by  the  associated  banks  and  continued 
to  be  administered  by  the  First  Trust  and  Savings  Bank  as  agent 
of  the  associated  banks.  Participation  certificates  were  issued  to 
the  associated  banks,  representing  their  pro  rata  interest  in  the 
assets  of  the  Chicago  National  Bank.  These  certificates  were 
issued  in  two  series,  designated  as  Series  A  and  Series  B.  Series 
A  represented  the  interest  of  the  associatd  banks  in  the  assets 
covered  by  the  promissory  note  of  John  R.  Walsh  and  Company, 
secured,  as  before  stated,  and  Series  B  represented  the  interest  of 
the  associated  banks  in  the  remaining  assets  Avhich  were  being 
administered  by  the  First  Trust  and  Savings  Bank. 

This  plan  was  followed  until  January,  1910,  at  which  time  a 
ten  per  cent,  dividend  was  declared  on  both  series  of  certificates, 
and  a  settlement  was  arranged  with  John  R.  Walsh  and  Company 
whereby  the  assets  purchased  by  him  and  his  associates  were  taken 
back  by  the  associated  banks  and  the  promissory  note  canceled. 
This  settlement  included  the  releasing  of  the  directors  of  the  Chi- 
cago National  Bank  under  their  individual  guarantee,  in  consid- 
eration of  their  transferring  certain  of  their  personal  assets  to 
the  First  Trust  and  Savings  Bank  as  trustee  for  the  benefit  of  the 
associated  banks. 

At  this  juncture  Series  A  and  B  participation  certificates 
were  called  in  and  new  certificates  were  issued  in  lieu  thereof,  des- 
ignated Series  C.  These  certificates  were  dated  February  1,  1910, 
and  aggregated  approximately  nine  million  dollars.  They  were 
issued  to  the  associated  banks  to  cover  their  interest  in  all  the 
remaining  assets  of  the  Chicago  National  Bank. 

A  notable  coincidence  in  connection  with  the  conference  on  the 
night  of  December  17,  was  the  fact  that  there  were  three  ex- 
Comptrollers  of  the  Currency  and  one  Comptroller  present.  The 
three  ex-Comptrollers  were  Messrs.  Lacey,  Eckels  and  Dawes, 
each  of  whom  was  at  that  time  president  of  a  banking  institution 
in  Chicago. 


258  ROMANCE  AND  TRAGEDY  OF  BANKING 

Legality  of  the  Action  of  the  Clearing  House  Banks 

Notwithstanding  the  undoubted  wisdom  of  the  course  pursued 
by  Mr.  Ridgely  and  the  associated  banks  of  Chicago  in  thus 
averting  a  disastrous  bank  failure  and  a  serious  disturbance  to  the 
financial  and  business  interests  not  only  of  Chicago  but  of  other 
sections,  the  legality  of  the  action  of  the  clearing  house  banks  in 
entering  into  an  agreement  with  John  R.  Walsh  and  the  directors 
of  his  bank  to  pay  the  creditors  of  the  three  banks,  was  questioned 
by  some,  and  the  Comptroller  and  the  banks  were  subjected  to 
criticism.  But  the  situation  was  critical  and  called  for  prompt 
action.  There  was  no  time  to  waste  in  quibbling  over  legal  tech- 
nicalities. The  Comptroller  believed  that  the  national  banks  that 
were  members  of  the  Clearing  House  Association  had  legal  right 
to  purchase  from  the  directors  of  the  Walsh  banks  their  pro  rata 
share  of  the  assets  of  these  institutions.  The  only  possible  legal 
objection  that  could  be  raised  to  their  doing  so  was  whether  any 
bank  in  the  combination,  in  assuming  a  pro  rata  share  of  the  lia- 
bilities of  the  Walsh  banks,  exceeded  the  limitations  of  law  in 
respect  to  loans.  This  question,  however,  was  considered  so  un- 
important compared  with  the  tremendous  interests  at  stake  that 
neither  the  Comptroller  nor  the  banks  gave  it  any  consideration. 
It  would  have  been  inexcusable  for  the  Comptroller  to  have 
allowed  a  question  of  this  nature  to  have  interfered  with  the  con- 
summation of  the  arrangement  agreed  upon. 

AVhen  the  magnitude  of  the  liabilities  of  the  Walsh  interests 
to  the  national  bank  and  the  other  banking  institutions  became  a 
matter  of  public  information,  the  Comptroller  was  further  criti- 
cised for  having  permitted  this  condition  to  continue  so  long 
before  corrective  measures  were  taken.  When  these  excessive 
loans  became  known  to  the  Comptroller  through  the  reports  of 
the  national  bank  examiners,  he  did  everytlving  in  his  power  to 
have  them  reduced  to  the  legal  limit,  not  only  by  correspondence 
with  the  directors  of  the  bank,  as  the  evidence  at  the  Walsh  trial 
demonstrated,  but  by  personal  conference  with  the  officers  and 
directors  of  the  association,  without  material  effect. 

The  sole  power  conferred  upon  the  Comptroller  of  the  Cur- 
rency to  enforce  a  compliance  with  the  law  in  regard  to  the  limit 


ROMANCE  AND  TRAGEDY  OF  BANKING  259 

of  loans  was  not  a  corrective  but  a  destructive  measure.  He  could 
no  doubt  have  compelled  the  Walsh  bank  to  reduce  the  excessive 
loans  under  a  threat  of  forfeiture  proceedings,  but  he  would  have 
destroyed  the  offending  association  by  instituting  such  a  suit. 

The  statutory  provision  authorizing  the  Comptroller  to  insti- 
tute a  suit  to  forfeit  the  charter  of  a,  national  bank  for  violating 
the  law  has  never  been  construed  as  mandatory.  It  always  had 
been  interpreted  as  vesting  in  him  a  discretionary  power,  and  no 
Comptroller  ever  felt  that  he  would  have  been  justified  in  resort- 
ing to  so  drastic  a  measure  without  first  endeavoring  to  have  the 
wrong  corrected  by  other  methods. 

The  wisdom  of  this  policy  was  forcibly  exemplified  in  the  case 
of  the  Walsh  bank.  Had  the  Comptroller  instituted  a  suit  to 
forfeit  the  charter  of  the  Chicago  National  Bank  when  it  became 
known  to  him  that  the  law  had  been  violated,  a  receiver  would 
have  been  the  result,  as  a  run  would  have  been  started  on  the  bank 
as  soon  as  it  became  known  that  such  a  suit  had  been  entered,  and 
in  order  to  protect  the  interests  of  all  depositors  alike  and  pre- 
vent a  preference  of  one  creditor  over  another  it  would  have  been 
necessary  for  the  Comptroller  to  have  appointed  a  receiver  for 
the  institution  even  before  the  suit  to  forfeit  the  charter  of  the 
association  could  have  been  heard  and  determined.  The  closing 
of  this  bank  would  have  been  followed  immediately  by  the  closing 
of  the  two  State  institutions,  and  three  receiverships  would  have 
been  necessary;  the  assets  of  the  three  institutions  would  have 
depreciated  in  value  and  the  creditors,  instead  of  receiving  pay- 
ment in  full  and  without  any  material  delay,  would  have  had  to 
await  the  receipt  of  their  deposits  through  the  slow  process  of 
installment  dividends  from  the  respective  receivers,  extending  over 
a  period  of  several  years,  and  undoubtedly  other  business  failures 
would  have  followed,  or  at  least  serious  embarrassments  would 
have  been  occasioned  in  consequence  of  the  large  amount  of  money 
that  would  have  been  tied  up  indefinitely  in  the  three  banking 
institutions. 

All  three  difficulties  were  avoided,  however,  by  the  wise  course 
pursued  by  the  Comptroller,  aided  by  the  clearing  house  banks. 
All  of  the  creditors  of  the  three  institutions    were    paid    in    full 


260  ROMANCE  AND  TRAGEDY  OF  BANKING 

without  delay,  and  no  serious  consequences  or  embarrassments 
were  experienced. 

The  Chicago  National  Bank  was  placed  in  liquidation  by  reso- 
lution of  its  shareholders  adopted  August  12,  1913,  to  take  effect 
on  the  fifteenth  of  the  same  month.  The  associated  banks  which 
assumed  its  liabilities  to  depositors  and  took  over  a  portion  of  its 
assets  in  payment  therefor,  returned  to  the  bank  in  1907  the 
remaining  assets,  amounting  in  value  to  about  $168,000,  from 
which  the  board  of  directors  declared  a  dividend  to  the  stock- 
holders of  $15  per  share. 

John  R.  Walsh,  the  president  of  the  bank,  and  the  controlling 
spirit  in  the  three  affiliated  banking  institutions,  was  indicted  for 
misapplication  of  the  funds  of  the  national  association  and  other 
violations  of  law.  He  was  placed  on  trial  in  November,  1907,  and 
was  found  guilty  January  19,  1908.  Every  legal  means  known  to 
his  counsel  was  resorted  to  to  have  the  verdict  set  aside.  Appeal 
was  made  to  the  higher  court  and  finall}^  to  the  Supreme  Court  of 
the  United  States,  consuming  nearly  two  years,  but  without  avail. 
He  was  then  sentenced  to  serve  a  term  of  five  years  and  entered 
the  Leavenworth  penitentiary  in  January,  1910.  After  being 
incarcerated  for  about  a  year  and  nine  months,  through  the 
efforts  of  his  friends  he  was  paroled  on  account  of  failing  health, 
and  died  in  Chicago,  October  23,  1911,  nine  days  after  his  release 
from  prison,  at  the  age  of  seventy-four  years. 

The  Bigelow  Defalcafion 

On  April  24,  1906,  the  Comptroller's  office  was  startled  by  the 
receipt  of  a  telegram  from  Milwaukee,  Wis.,  stating  that  Frank 
G.  Bigelow,  the  president  of  the  First  National  Bank  of  Mil- 
waukee, was  a  defaulter  to  the  extent  of  one  million  four  hundred 
and  fifty  thousand  dollars,  an  amount  in  excess  of  the  combined 
capital,  surplus  and  profits  of  the  bank. 

Bigelow  had  been  president  of  the  American  Bankers'  Asso- 
ciation, was  widely  known  among  the  bankers  of  the  country^,  and 
had  been  prominent  and  active  in  every  movement  affecting  bank- 
ing and  financial  interests. 


ROMANCE  AND  TRAGEDY  OP  BANKING  261 

When  the  shortage  was  discovered,  a  meeting  of  the  board  of 
directors  of  the  bank  was  called,  at  which  Mr.  Bigelow  was  pres- 
ent. When  confronted  with  the  accusation  against  him  he  calmly 
informed  the  directors  that  he  had  a  painful  confession  to  make 
to  them  and  admitted  that  he  had  misappropriated  the  funds  of 
the  association.  An  examination  of  the  books  of  the  bank,  he 
stated,  would  show  that  he  owed  the  institution  nearly  a  million 
and  a  half  dollars.  The  money,  he  said,  had  been  lost  in  specula- 
tion in  wheat  and  stocks,  that  none  of  it  could  be  recovered,  and 
all  that  he  could  offer  the  bank  in  return  for  the  loss  was  personal 
securities  of  the  value  of  about  three  hundred  thousand  dollars. 

At  first  some  of  the  directors  of  the  bank  were  disposed  to 
make  good  the  loss  and  conceal  the  defalcation  from  the  public, 
through  fear  of  the  effect  of  the  disclosures  upon  the  bank,  but 
after  deliberation  they  finally  concluded,  for  the  protection  of  the 
depositors,  to  make  up  the  shortage  and  report  the  defalcation  to 
the  Federal  authorities.  A  resolution  was  therefore  adopted  by 
the  board  removing  Bigelow  from  the  presidency  of  the  bank,  and 
a  warrant  was  sworn  out  for  his  arrest. 

There  was  nothing  novel  in  Bigelow's  method  of  concealment 
of  his  large  shortage.  He  manipulated  the  accounts  with  corre- 
spondent banks  and  with  approved  reserve  agents.  The  collection 
accounts  and  balances  with  reserve  agents  were  made  to  appear 
several  hundred  thousand  dollars  larger  than  they  were.  The 
defalcation  was  discovered  not  by  the  bank  examiner,  nor  by  any 
officer  or  director  of  the  bank,  but  by  an  employee,  whose  suspi- 
cions were  aroused  by  some  questionable  entries  in  the  books,  and 
he  communicated  his  suspicions  to  one  of  the  directors.  An  inves- 
tigation was  immediately  instituted,  which  led  to  a  discovery  of 
the  shortage  and  the  confession  of  Bigelow. 

When  the  amount  of  the  defalcation  was  ascertained,  the 
directors  heroicallj^  came  to  the  relief  of  the  bank  and  the  protec- 
tion of  its  depositors  by  immediately  signing  an  agreement  pledg- 
ing themselves  to  advance  and  pay  to  the  bank  the  sums  set  oppo- 
site their  names,  as  it  might  be  needed  for  the  payment  of  depos- 
itors. The  respective  sums  subscribed  by  each  director  varied  in 
amount  from  ten  thousand  to  six  hundred  thousand  dollars,  and 
aggregated  one  million  six  hundred  and  thirty-five  thousand. 


262  ROMANCE  AND  TRAGEDY  OF  BANKING 

Before  the  news  of  the  defalcation  was  made  public,  the  direc- 
tors secured  from  Chicago  one  million  dollars,  thus  fortifying  the 
bank  against  a  run  and  saving  the  institution  from  suspension.  A 
run,  however,  was  started  as  soon  as  the  shortage  became  known, 
not  only  on  this  bank  but  upon  other  banks  in  Milwaukee,  and  in 
about  two  hours'  time  nearly  a  million  dollars  was  withdrawn  from 
the  First  National.  At  the  same  time,  while  there  was  a  long  line 
of  depositors  at  the  paying  teller's  window  withdrawing  their 
money,  many  friends  of  the  institution  manifested  their  confidence 
in  its  officers  and  the  solvency  of  the  bank  by  making  deposits  at 
the  receiving  teller's  window. 

Bigelow  at  one  time  was  rated  a  millionaire.  He  was  promi- 
nent in  business  and  social  affairs  in  Milwaukee,  and  was  a  mem- 
ber of  several  clubs  and  civic  organizations.  He  freely  admitted 
his  defalcation  when  confronted,  offered  no  apology  for  his 
wrongdoings,  and  was  sentenced  to  and  served  a  term  in  the 
penitentiary. 

Culpahility  of  the  Bank  Examiner 

The  failure  of  the  bank  examiner  to  discover  this  shortage  was 
the  subject  of  considerable  public  criticism.  He  was  summoned 
to  Washington  by  the  Comptroller  and  instructed  to  bring  with 
him  all  of  the  verification  returns  covering  his  several  examina- 
tions of  this  bank,  as  it  was  not  understood  why  this  shortage  was 
not  discovered,  if  bank  balances  had  been  properly  verified.  These 
returns  showed  a  number  of  discrepancies  in  the  accounts  of  cor- 
respondent and  reserve  banks,  and  an  attempt  to  reconcile  any 
one  of  them  would  have  led  to  a  detection  of  the  shortage.  When 
asked  for  an  explanation  as  to  why  he  neglected  to  reconcile  these 
differences,  the  examiner  stated  that  he  relied  upon  his  assistant 
to  do  that  work  for  him,  and  that  his  instructions  to  him  were 
that  if  he  found  any  differences  in  the  returns  to  call  his  attention 
to  them  and  to  file  all  others.  He  stated  that  his  clerk  had  neg- 
lected to  perform  this  duty  and  that  when  the  defalcation  was 
discovered,  and  the  manner  in  which  it  was  effected  disclosed,  he 
examined  the  verification  returns  of  some  of  the  banks  whose 
accounts  were  reported  to  have  been  manipulated  and  learned  for 


CASSIE  CHADWICK 

Copied  from  an  original  photograph  made  about  1897,  and  secured 

through  the  courtesy  of  C.  A.  Farnesworth  of  the 

Union  Trust  Co.,  Cleveland 


ROMANCE  AND  TRAGEDY  OF  BANKING  263 

the  first  time  of  these  discrepancies,  and  that  his  clerk  had  not 
brought  them  to  his  attention,  but  filed  them  away  without  exami- 
nation. The  Comptroller,  however,  held  the  examiner  responsible 
for  the  negligence  of  his  irresponsible  clerk  and  required  him  to 
tender  his  resignation. 


Bank  Failures  During  Mr.  Ridgeli/'s  Administration 

During  Mr.  Ridgely's  administration  eighty-three  national 
banks  were  placed  in  the  hands  of  receivers. 

The  most  sensational  of  these  failures  was  that  of  The  Citizens 
National  Bank  of  Oberlin,  Ohio,  which  suspended  November  28, 
1904.  This  was  not  a  large  bank.  Its  capital  stock  was  only 
sixty  thousand  dollars,  and  its  deposits  a  little  over  four  hundred 
thousand  dollars,  but  for  absolute  imbecility  of  management  it 
perhaps  has  no  parallel  in  the  history  of  national  bank  failures. 
This  bank  was  wrecked  by  a  woman,  the  celebrated  Cassie  A.  Chad- 
wick,  a  female  Napoleon  of  finance,  who  succeeded  in  completely 
deceiving  not  only  the  officers  of  the  bank  as  to  her  financial 
worth  but  every  one  else  with  whom  she  had  any  business  dealings. 

The  wrecking  of  this  institution  and  the  pathetic  end  of  its 
aged  president  was  due  to  his  having  violated  the  law  to  a  small 
extent  in  the  first  instance  by  making  a  loan  of  $13,000  to  this 
woman,  which  was  $7,000  in  excess  of  the  limit  of  a  loan  that  this 
bank  could  lawfully  make.  This  loan  was  negotiated  for  her  by 
two  individuals  whom  the  president  of  the  bank  knew,  who  repre- 
sented to  him  that  they  were  engaged  in  a  deal  with  Mrs.  Chad- 
wick,  involving  the  sum  of  thirty  thousand  dollars,  and  that  they 
had  in  their  possession  gilt-edged  collateral  to  amply  secure  the 
loan.  Relying  upon  their  representations,  and  without  seeing  or 
obtaining  possession  of  the  securities,  the  president  of  the  bank 
made  the  loan.  This  loan  was  paid  at  maturity  and  its  prompt 
payment  paved  the  way  to  the  greater  extension  of  credit  which 
followed.  This  woman  had  more  or  less  business  dealings  with 
the  president  of  the  bank  and  the  cashier  personally  from  that 
time  on  until  about  August,  1903,  when  she  applied  for  a  loan  of 
eighty  thousand  dollars.  In  the  meantime  she  appeared  to  have 
satisfied  the  president  that  she  was  the  owner  in  equity  of  five 


264  ROMANCE  AND  TRAGEDY  OF  BANKING 

million  dollars  of  United  States  Steel  five  per  cent,  gold  bonds, 
with  the  right  of  the  income  therefrom.  She  produced  docu- 
mentary evidence  showing  that  she  was  the  owner  of  bonds,  stocks 
and  other  securities  in  the  hands  of  a  prominent  and  wealthy 
citizen  of  Pittsburg,  no  less  a  personage  than  Mr.  Andrew  Car- 
negie, as  trustee,  to  the  amount  of  over  ten  millions  of  dollars. 
These  documents  were  in  legal  form,  neatly  prepared  and  bore 
every  evidence  of  being  genuine,  even  to  the  signature  of  Mr. 
Carnegie  and  others. 

This  loan  of  eighty  thousand  dollars  was  made  and  was  sub- 
sequently increased  to  ninety-three  thousand  dollars  to  cover  in- 
terest and  charges,  solely  upon  the  confidence  of  the  president  of 
the  bank  in  the  truth  of  Mrs.  Chadwick's  representations. 

When  the  president  of  the  bank  found  that  the  loan  was  liable 
to  run  for  some  time  he  bethought  himself  of  security,  and  ob- 
tained from  Mrs.  Chadwick  an  assignment  of  two  hundred  and 
thirty  thousand  dollars  of  the  steel  bonds,  with  power  of  attorney 
attached  and  a  statement  from  a  prominent  banker  in  a  nearby 
city  that  he  held  in  trust  for  her  securities  to  the  amount  of  three 
million  dollars  free  of  any  lien  whatever.  She  also  exhibited  to 
tlie  president  of  the  bank  a  will  which  she  had  prepared,  making 
him  the  executor  of  her  estate,  in  which  all  her  securities  were 
listed  and  described. 

Subsequently  she  obtained  additional  loans  from  the  bank, 
ranging  in  amount  from  four  to  thirty-five  thousand  dollars, 
which  she  claimed  was  necessary  for  her  to  have  temporarily  to 
satisfy  pressing  creditors,  pending  a  settlement  of  her  liabilities 
in  full.  Finally  she  made  an  assignment  of  her  alleged  five  millions 
of  securities  in  the  hands  of  her  trustees  to  the  president  of  the 
bank,  individually,  canceling  the  previous  assignment  to  the  bank 
of  two  hundred  and  fifty  thousand  dollars,  which  latter  assign- 
ment was  surrendered  to  her. 

The  next  move  of  this  supposedly  wealthy  adventuress  was  to 
send  by  mail  to  her  dupe,  the  president  of  the  Oberlin  bank,  a 
check  on  a  trust  company  in  New  York  City  for  eleven  thousand 
dollars,  with  a  request  for  a  New  York  draft  in  exchange.  Her 
request  was  promptly  honored,  but  the  check  proved  to  be 
worthless. 


««d 


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Assignment  of  the  ^500,000  Forged  Carnegie  Note 


wi/y  ^^.^ /i...^,^ . 

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^a-yv-K^. 


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BOGUS  TRUST  AGREEMENT 
Used  by  Cassie  Chadwick  in  her  borrowing  operations 


«/C^    (Ta-^ji     <:7f     ^^  ^^olHRJ  cry    ^Jattc/  <!ij^<^<jMA 
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BOGUS  TRUST  AGREEMENT 
Continuation,  showing  signature  of  Andrew  Carnegie  forged  by  Cassie  Chadwick 


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Assignment  of  the  ^250,000  Forged  Carnegie  Note 


ROMANCE  AND  TRAGEDY  OF  BANKING  265 

Her  next  deal  with  the  Oberlin  bank  was  to  submit  an  offer 
to  the  president  of  a  note  purporting  to  have  been  signed  by  Mr. 
Andrew  Carnegie  for  five  hundred  thousand  dollars  in  exchange 
for  the  assignment  of  the  five  millions  of  securities  which  the  bank 
held.  The  president  of  the  bank  readily  accepted  this  proposi- 
tion, surrendered  the  assignment  and  received  the  Carnegie  note, 
which  he  accepted  without  question  as  being  genuine,  relying 
upon  his  familiarity  with  the  signature  of  Mr.  Carnegie,  which 
he  said  he  had  seen  on  other  papers. 

When  questioned  as  to  how  she  became  possessed  of  so  much 
wealth  and  why  Mr.  Carnegie  gave  her  his  note  for  so  large  a 
sum  of  money,  she  stated  that  she  was  the  illegitimate  child  of 
Mr.  Carnegie,  and  that  he  had  settled  on  her  the  securities  before 
mentioned,  amounting  to  over  ten  millions  of  dollars,  for  the 
purpose  of  righting  the  wrong  occasioned  by  her  birth. 

About  this  time  the  bank  was  due  for  examination  and  the 
examiner  was  likely  to  drop  in  any  day.  The  president  was 
anxious  to  conceal  from  the  examiner  the  large  unlawful  loan  to 
Mrs.  Chadwick,  and  conferred  with  her  in  regard  to  making  some 
arrangement  that  would  pass  the  inspection  of  the  examiner. 
The  resourcefulness  of  Mrs.  Chadwick  was  equal  to  the  emergency. 
She  enlisted  the  interest  of  some  of  her  friends,  who  arranged  to 
negotiate  a  loan  through  a  trust  company,  but  the  board  of 
directors  of  the  company  refused  to  make  the  loan  when  the  ap- 
plication was  brought  to  their  attention. 

The  regular  examination  of  the  bank  was  made  in  April, 
1904.  The  loan  to  Mrs.  Chadwick  then  amounted  to  two  hundred 
and  twenty  thousand  dollars,  and  was  so  reported  by  the  examiner 
to  the  Comptroller,  but  the  examiner  reported  that  while  the  loan 
was  largely  in  excess  of  the  legal  limit  it  was  amply  secured  and 
that  there  was  no  danger  of  the  bank  sustaining  any  loss  thereon ; 
that  he  had  seen  the  security,  and  that  it  fully  protected  the  loan. 
He  reported  this  loan  as  having  been  made  to  C.  A.  Chadwick,  but 
did  not  report  that  C.  A.  Chadwick  was  a  woman,  or  that  the 
security  for  the  loan  was  a  note  of  Andrew  Carnegie.  He  assured 
the  Comptroller  that  arrangements  were  being  made  to  immedi- 
ately reduce  the  loan  to  the  legal  limit  and  that  he  had  insisted 
upon  this  being  done. 


266  ROIVIANCE  AND  TRAGEDY  OF  BANKING 

Had  this  examiner  advised  the  Comptroller  that  the  recipient 
of  this  large  loan  was  a  woman  and  that  the  security  consisted 
of  a  note  of  Andrew  Carnegie,  the  Comptroller  would  have  been 
put  on  his  inquiry  in  regard  to  this  woman  and  why  Andrew  Car- 
negie had  executed  his  note  to  her  for  such  a  large  sum  of  money, 
as  Mr.  Carnegie  was  not  in  the  habit  of  having  his  notes  in  na- 
tional banks. 

At  the  time  of  the  previous  examination  of  this  bank  the  loan 
was  concealed  from  the  examiner  by  a  temporary  loan  negotiated 
by  the  president  which  was  paid  immediately  after  the  examina- 
tion. 

In  the  meantime,  while  the  president  of  the  bank  seems  to 
have  become  alarmed  over  this  large  liability  and  appears  to  have 
made  strenuous  efforts  to  secure  the  payment  or  reduction  of  the 
loan,  he  continued  to  make  further  advances  and  when  the  bank 
failed  Mrs.  Chadwick  was  liable  to  the  association  for  two  hun- 
dred and  fifty  thousand  dollars,  or  over  four  times  the  amount 
of  the  capital  stock  of  the  association. 

The  credulous  president  of  the  bank  apparently  Avas  com- 
pletely hypnotized  by  this  woman  and  not  only  freely  loaned  to 
her  the  funds  of  the  institution  but  made  her  liberal  advances  from 
his  personal  resources.  So  complete  was  his  confidence  in  her 
honesty  and  her  financial  ability  to  fully  discharge  her  obligations 
to  the  bank  and  to  himself  that  for  several  days  after  the  bank 
failed  he  still  believed  and  maintained  that  she  would  come  forward 
and  meet  her  obligations. 

After  the  failure  of  the  association  and  the  sensational  dis- 
closures which  followed,  the  antecedents  of  this  woman  were  thor- 
oughly investigated  and  exposed,  and  while  much  that  was  then 
written  of  her  history  was  no  doubt  untrue,  or  at  least  greatly  ex- 
aggerated, according  to  the  statements  published  at  that  time  it 
appears  that  her  maiden  name  was  Elizabeth  Bigley,  and  that  she 
was  born  at  or  near  Woodstock,  Canada.  She  was  reported  to 
have  been  indicted  in  her  younger  days  for  forgery,  but  on  trial 
was  acquitted  on  the  ground  that  she  was  mentally  unsound  at 
the  time  she  committed  the  act.  Later  she  was  known  as  Mrs. 
Hoover,  having  married  one  C.  L.  Hoover,  a  resident  of  Cleve- 
land, Ohio,  who  was  many  years  her  senior.     She  was  next  known 


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Forged  Carnegie  Note  for  ^500,000,  and  Indorsements 


ROMANCE  AND  TRAGEDY  OF  BANKING  267 

as  Madam  De  Vere,  a  clairvoyant,  who  formerly  resided  at 
Toledo,  Ohio,  and  who  had  served  a  term  of  nine  and  one-half 
years  in  the  Ohio  penitentiary  for  f orgei-y. 

After  her  release  from  the  penitentiary  she  is  reported  to 
have  married  a  Dr.  Chadwick,  of  Cleveland,  and  subsequently  to 
have  begun  her  career  as  a  financier.  Her  method  of  operation 
seemed  to  be  of  the  endless  chain  variety,  borrowing  from  one 
creditor  to  pay  another  and  by  promptly  meeting  her  obligations 
in  this  manner  at  maturity  she  acquired  a  financial  standing  and 
credit  which  enabled  her  to  maintain  and  enlarge  the  scope  of  her 
operations  until  the  end  of  the  chain  was  reached  in  the  collapse 
of  The  Citizens  National  Bank  of  Oberlin. 

The  reputed  wealth  on  which  she  based  her  operations  and 
secured  credit  consisted  of  the  following  so-called  securities,  bear- 
ing the  alleged  signature  of  Andrew  Carnegie : 

Two  notes  held  by  The  Citizens  National  Bank  of  Oberlin  for 
$500,000  and  $250,000  respectively. 

One  note  for  $500,000. 

A  certificate  for  $5,000,000. 

A  certificate  of  trusteeship  for  securities  held  by  a  trust  com- 
pany in  Cleveland  for  $7,500,000,  making  a  total  of  $13,750,000. 
all  of  which  proved  to  be  forgeries. 

At  the  time  of  her  dealings  with  the  Citizens  National  Bank 
of  Oberlin,  she  lived  at  Cleveland,  Ohio.  Her  home,  it  was  stated, 
was  furnished  elaborately,  but  displayed  no  special  taste.  Her 
parlors  were  filled  with  carvings,  statuettes  and  ornaments  im- 
ported from  Europe,  and  numerous  paintings  adorned  the  walls, 
giving  the  interior  of  her  home  the  appearance  of  wealth,  but  the 
furnishings  appear  to  have  been  selected  without  discrimination 
or  any  definite  plan  of  arrangement. 

After  the  failure  of  the  bank  she  was  indicted,  tried  at  Cleve- 
land and  convicted  for  defrauding  the  institution  and  was  sen- 
tenced for  a  term  of  years  to  the  same  penitentiary  in  which 
Madam  De  Vere  had  been  confined  years  before,  where  she  died 
while  serving  sentence. 

Thus  closed  the  career  of  probably  the  most  notorious  and 
successful  bank  swindler  known  in  the  annals  of  the  national  bank- 
ing system. 


268  ROMANCE  AND  TRAGEDY  OF  BANKING 

The  deluded  president  of  the  wrecked  bank  died  before  Mrs^ 
Chadwick's  trial  and  conviction,  a  victim  of  his  own  folly,  caught 
in  the  meshes  spread  for  him  through  his  violation  of  the  banking 
laws  and  the  sacred  obligation  of  his  oath  of  office.  The  first 
false  step  in  his  dealings  with  Mrs.  Chadwick  was  in  making  the 
original  loan  of  thirteen  thousand  dollars,  which  was  seven  thou- 
sand dollars  in  excess  of  the  legal  limit.  Each  succeeding  increase 
of  credit  was  extended  in  an  effort  to  secure  and  recover  the 
previous  loan,  until  the  aggregate  of  her  liabilities  reached  a  point 
where  the  bank  and  himself  individually  became  hopelessly  in- 
volved, and  the  inevitable  result  followed. 

How  many  bankers  who  have  read  the  story  of  this  failure  and 
the  causes  which  led  to  it,  will  profit  by  the  lesson  it  teaches? 
Every  president,  and  every  cashier  who  is  a  director  of  a  national 
bank,  is  required  by  law  to  take  and  subscribe  to  an  oath  that  he 
will  not  knowingly  violate  or  willingly  permit  to  be  violated  any 
of  the  provisions  of  the  national  banking  laws.  The  president  of 
The  Citizens  National  Bank  of  Oberlin  subscribed  to  this  oath  and 
his  violation  of  it  brought  disaster  upon  his  institution,  loss  to 
his  depositors  and  stockholders,  and  financial  ruin  and  dishonor 
to  himself. 

There  are  presidents  and  cashiers  of  national  banks  who, 
while  scrupulously  honest  in  all  their  business  dealings  with  their 
fellow  men  and  religiously  true  to  every  trust  reposed  in  them, 
deliberately  violate  their  oaths  of  office  with  apparently  no  more 
compunction  of  conscience  than  had  the  president  of  the  Oberlin 
bank.  How  such  men  reconcile  themselves  with  their  consciences 
it  is  difficult  to  imagine. 

Bank  failures  that  have  not  been  due  to  violations  of  law  are 
very  rare,  and  if  every  officer  and  director  of  a  bank  should  be 
true  to  his  oath  of  office,  temporary  suspensions  occasionally 
might  become  necessary  under  extraordinary  conditions,  but  in- 
solvency would  not  intervene,  and  the  creditors  and  stockholders 
would  not  suffer  loss.  Because,  if  the  officers  and  directors  of 
the  bank  restrict  the  loans  to  any  one  individual  or  interest  to 
the  limit  fixed  by  law,  and  do  not  undertake  to  circumvent  its  re- 
strictions by  indirect  methods,  the  loss  upon  any  single  loan 
would  not  be  sufficient  to  seriously  affect  the  bank  or  impair  its 


KOJVIANCE  AND  TRAGEDY  OF  BANKING  269 

solvency.  It  is  the  excessive  loan,  no  matter  in  what  form  it  may 
be  made,  that  does  the  damage,  and  no  officer  or  director  can 
make  such  a  loan,  directly  or  indirectly,  without  violating  his 
oath  of  office  and  inviting  the  consequences  that  follow. 


Obligations  of  Directors 

On  one  occasion  a  prominent  member  of  Congress,  who  was 
at  that  time  president  of  a  national  bank,  called  at  the  Comp- 
troller's office  for  a  conference  in  regard  to  several  excessive  loans 
that  had  been  made  by  his  bank  with  his  knowledge  and  consent. 
These  loans  had  been  freely  criticised  by  the  Comptroller  and 
their  reduction  to  the  legal  limit  was  insisted  upon.  He  took 
exception  to  tlie  criticisms  on  the  ground  that  the  loans  were  con- 
sidered perfectly  safe,  as  all  such  loans  are  claimed  to  be,  and  in 
addition  were  well  secured.  He  contended  that  they  were  the 
very  best  loans  in  the  bank  and  that  it  was  necessar}-  for  his 
bank  to  extend  the  accommodation  in  order  to  retain  the  business 
of  these  customers.  The  attention  of  this  law  maker  was  called 
to  the  fact  that  following  his  election  as  a  director  each  year  he 
had  taken  an  oath  that  he  would  not  violate  or  knowingly  permit 
to  be  violated  any  of  the  provisions  of  the  national  banking  laws. 
He  admitted  that  these  loans  exceeded  the  legal  limit  and  that 
they  were  made  in  violation  of  law  with  his  knowledge  and 
approval,  and  in  answer  to  an  inquiry  as  to  how  he  reconciled 
himself  with  his  conscience  in  thus  deliberately  violating  the  law, 
he  replied,  after  some  hesitation,  that  "he  had  not  considered  the 
matter  in  that  light  before."  He  was  told  that  Congress  made 
the  laws  and  that  it  was  the  sworn  duty  of  the  Comptroller  to 
enforce  an  observance  of  them  without  exception,  and  that  the 
Comptroller  had  no  power  to  waive  a  provision  of  the  statute  or 
to  relieve  or  absolve  him  from  the  obligation  of  his  oath  of  office. 
He  finally  declared  that  he  would  have  the  loans  reduced  to  the 
limit  and  that  thereafter  while  he  was  president  of  the  bank  he 
would  not  make  or  permit  to  be  made  any  loan  in  excess  of  the 
legal  limit. 

This  incident  is  related  simply  to  illustrate  the  conception 
that  some  officers  of  banks  have  of  the  obligation  they  assume, 


270    ROMANCE  AND  TRAGEDY  OF  BANKING 

morally  and  legally,  when  they  swear  once  each  year  that  they 
will  not  wilfully  violate  or  knowingly  permit  to  be  violated  any 
of  the  provisions  of  the  national  banking  laws.  Unfortunately, 
they  are  not  all  as  scrupulously  honest  in  this  respect  as  the 
director  referred  to,  or  as  the  Quaker  directors  of  a  national 
bank  in  Pennsylvania,  who  qualified  their  affirmation  not  to  vio- 
late the  law  by  adding  the  words  "except  as  to  the  limit  of  loans." 

Arthur  B.  Spear,  cashier  of  the  Oberlin  bank,  was  indicted 
and  convicted  for  making  false  entries  in  the  books  of  the  asso- 
ciation for  the  purpose  of  deceiving  the  bank  examiner  and  the 
Comptroller.  Spear  certified  that  according  to  the  records  of 
the  bank  Mrs.  Chadwick  had  a  certain  deposit  in  the  bank  when 
the  fact  was  she  did  not  have  any.  It  was  alleged  at  the  trial 
of  Spear  that  he  made  the  false  entries  by  direction  of  the  presi- 
dent, but  that  he  had  not  profited  in  any  Ava}^  b}'^  the  transaction. 
Beckwith,  the  president,  having  died  before  the  trial  of  Spear, 
the  brunt  of  the  affair  fell  upon  the  latter.  He  was  sentenced 
to  the  penitentiary  for  a  term  of  seven  years,  but  his  sentence 
was  commuted  by  the  President  before  completion. 

In  the  liquidation  of  the  bank  under  the  receivership,  the 
losses  on  assets  compounded  or  sold  under  order  of  the  court, 
amounted  to  $246,561.  An  assessment  of  one  hundred  per  cent, 
was  levied  upon  the  stockholders,  of  which  amount  $47,171,  or 
over  seventy-six  per  cent.,  was  collected,  and  seventy-seven  per 
cent,  was  paid  to  the  depositors  and  other  creditors,  amounting 
to  $236,928.41. 

The  receivership  was  finally  closed  pJune  .'30,  1913. 

Failures  of  the  National  Bank  of  North  America  and  the 
Amsterdam  National  Bank  of  New   York  City 

The  failures  of  the  National  Bank  of  North  America  and  the 
Amsterdam  National  Bank  of  New  York  City,  which  occurred 
during  the  last  year  of  Mr.  Ridgely's  administration,  while  not 
involving  very  large  interests,  were  of  no  less  importance  because 
of  the  prominence  of  the  parties  concerned  and  the  intimate  rela- 
tion of  these  failures  to  the  panic  of  1907. 


ROMANCE  AND  TRAGEDY  OF  BANKING  271 

These  banks  were  not  large  institutions,  measured  by  the 
standard  of  what  constitutes  largeness  in  New  York  City,  and 
neither  bank  was  insolvent  when  it  was  closed. 

The  capital  of  the  National  Bank  of  North  America  was 
$2,000,000.  Its  deposits  amounted  to  $6,890,000,  and  its  total 
liabilities  to  $13,326,000.  It  was  placed  in  the  hands  of  a  receiver 
by  the  Comptroller  on  January  27,  1908,  after  the  adoption  of 
a  resolution  by  its  board  of  directors  requesting  him  to  make  an 
examination  of  the  bank,  and  to  take  temporary  charge  of  its 
affairs,  if,  in  his  judgment,  the  situation  warranted  such  action. 

This  resolution  of  the  directors  was  not  adopted  because  of 
any  belief  on  their  part  that  the  bank  was  insolvent.  But  on 
account  of  the  extreme  difficulty  experienced  in  realizing  on  the 
assets  rapidly  enough  to  enable  them  to  meet  the  demands  of 
depositors,  which  had  been  very  heavy  and  persistent  during  the 
several  previous  days,  and  the  fear  of  further  large  withdrawals, 
they  deemed  it  best  in  the  interests  of  the  association  to  tempo- 
rarily suspend  operations  and  thus  prevent  a  sacrifice  of  the 
assets,  which  otherwise  would  have  been  necessary,  as  the  Clearing 
House  Association  had  refused  to  extend  to  the  bank  any  further 
assistance. 

The  persistent  run  upon  this  institution  which  necessitated 
its  suspension  was  due  wholly  to  a  lack  of  confidence  in  the  man- 
agement, of  which  Charles  W.  Morse  was  the  controlling  factor. 
Morse  was  known  to  be  intimately  associated  with  F.  Augustus 
Heinze,  who  at  that  time  was  very  much  in  the  public  eye,  having 
acquired  an  unenviable  reputation  in  connection  with  his  pro- 
longed contest  with  the  Standard  Oil  Company  in  Montana  over 
a  deal  in  Amalgamated  Copper.  He  had  been  accused  of  having 
manipulated  the  courts  and  the  Legislature  of  that  State  in  his 
own  interests,  and  of  other  dishonoi-able  transactions  in  mining 
and  banking,  and  Thomas  W.  Lawson  made  him  the  object  of 
criticism  in  his  articles  on  "Frenzied  Finance."  Morse,  Heinze 
and  their  associates  had  the  reputation  of  being  speculators,  or, 
at  least,  of  being  engaged  in  operations  of  very  questionable 
merit.  They  jointly  owned  or  controlled  a  number  of  small  bank- 
ing institutions  in  New  York,  National  and  State.  It  was 
assumed,  as  a  matter  of  course,  that  the  speculative  operations 


272  KOMANCE  AND  TRAGEDY  OF  BANKING 

in  which  thej  were  known  to  be  engaged,  were  being  financed  by 
these  banks,  and  this  suspicion  was  not  calculated  to  inspire  con- 
fidence in  the  management  of  the  banks  or  in  the  stability  of  the 
institutions  with  which  they  were  connected.  Consequently,  on 
the  first  indication  of  a  financial  disturbance,  these  institutions 
were  the  object  of  distrust  and  attack,  and  the  panic  of  1907 
forced  them  to  succumb. 

That  the  National  Bank  of  North  America  was  not  insolvent 
when  it  was  closed  was  fully  demonstrated  b}'  the  rapid  liquida- 
tion of  its  affairs  under  the  receivership.  Its  creditors  were  paid 
in  full  with  interest  from  the  date  of  closing,  and  cash  and  assets 
amounting  to  $2,387,750  were  returned  to  the  stockholders.  The 
receivership  was  finally  closed  October  31,  1908,  within  eight 
months  from  the  date  of  suspension. 

New  Amsterdam  National  Bank 

The  New  Amsterdam  National  Bank  was  closed  under  similar 
circumstances  and  liquidated  with  like  results.  The  capital  of 
this  association  was  $1,000,000,  its  deposits  $3,269,000,  and  its 
total  liabilities  $5,984,000.  The  bank  was  not  insolvent  when  it 
was  closed.  This  institution  was  known  as  the  theatrical  bank 
of  New  York  City.  Its  depositors  and  customers  consisted  largely 
of  actors,  race  track  men,  gamblers,  saloon-keepers  and  sports- 
men. The  bank  was  placed  in  the  hands  of  a  receiver  January  30, 
19v:8.  Its  depositors  were  paid  in  full  with  interest  from  the 
date  of  closing,  and  the  receivership  was  finally  terminated 
April  14,  1909,  after  turning  over  to  an  agent  of  the  stockholders 
cash  and  assets  amounting  to  $1,027,612. 

After  the  elimination  of  F.  Augustus  Heinze  from  the  Mer- 
cantile National  Bank  and  the  closing  of  the  National  Bank  of 
North  America  and  the  New  Amsterdam  National  Bank,  the 
Federal  authorities  at  Washington  put  expert  accountants  on 
the  books  of  these  three  institutions  for  the  purpose  of  ascer- 
taining whether  any  criminal  violations  of  law  had  been  com- 
mitted by  Heinze,  Morse  and  others  in  connection  with  their 
management  of  these  banks.  As  a  result  of  these  investigations 
Heinze  and  Morse  were  indicted  by  the  Federal  Grand  Jury  for 


ROMANCE  AND  TRAGEDY  OF  BANKING  273 

misapplication  of  the  funds  of  the  Mercantile  National  Bank 
and  falsification  of  the  books  of  the  National  Bank  of  North 
America  in  connection  with  certain  loans  made  upon  the  stock 
of  the  American  Ice  Company,  a  Morse  concern.  Morse  was 
tried  first.  His  trial  covered  a  period  of  several  weeks,  and 
resulted  in  a  verdict  of  guilty.  He  subsequently  resorted  to  every 
known  means  and  legal  technicality  to  secure  a  new  trial,  but 
without  avail,  and  was  finally  sentenced  to  a  term  of  fifteen  years 
in  the  penitentiary  at  Atlanta,  Ga.  After  serving  about  two  and 
a  half  years  of  his  sentence,  Morse  was  pardoned  by  President 
Taft  because  of  failing  health,  it  having  been  represented  to  him, 
and  substantiated  by  medical  experts  after  an  examination,  that 
he  would  live  but  a  few  months  if  his  incarceration  in  prison  were 
continued. 

Heinze  was  more  fortunate.  He  was  tried  some  months  later 
and  acquitted.  The  original  indictment  of  Heinze  in  1909  con- 
tained a  number  of  counts,  many  of  which  were  stricken  out  by 
the  court  on  the  trial  of  the  case  upon  technical  grounds.  The 
court  held  that  the  indictment  charging  misapplication  of  the 
funds  of  the  Mercantile  National  Bank  was  defective  because  it 
did  not  charge  conversion  of  such  funds,  and  that  the  word  "con- 
version" was  necessary  as  supplying  the  legal  measure,  which  the 
court  was  unable  to  find  in  the  indictment  for  "willful  mis- 
application." 

In  1910  Heinze  Avas  again  indicted  on  practically  the  same 
charge,  the  indictment  alleging  that  the  purpose  of  the  misap- 
plication of  the  funds  of  the  bank  was  to  inflate  the  stock  of  the 
United  Copper  Company.  The  indictment  was  again  found  to 
be  faulty  and  was  quashed.  The  Government  then  appealed  from 
the  decision  of  the  court  to  the  Supreme  Court  of  the  United 
States,  under  the  Act  of  Congress  of  March  2,  1907,  authorizing 
an  appeal  by  the  Government  in  criminal  cases  involving  points 
of  law.  On  December  5,  1910,  the  Supreme  Court  reversed  the 
decision  of  the  United  States  Circuit  Court  of  New  York  and 
held  that  the  various  counts  in  the  indictments  referred  to  charg- 
ing Heinze  with  misapplication  of  the  funds  of  the  bank  were 
sufl^cient.  But  as  the  transactions  covered  by  the  indictments  on 
which  the  Supreme  Court  ruled  were  practically  the  same  as  those 


274  ROMANCE  AND  TRAGEDY  OF  BANKING 

covered  by  the  indictment  on  which  Heinze  was  tried  and 
acquitted  during  the  previous  spring,  no  further  action  was  taken 
by  the  Government,  and  Heinze  escaped  punishment. 

The  Farmers  and  Drovers  National  Bank  of  Wayneshurg,  Pa. 

The  Farmers  and  Drovers  National  Bank  was  placed  in  the 
hands  of  a  receiver  on  December  12,  1906.  This  was  a  very  old 
and  reputable  institution.  It  was  originally  organized  in  1835, 
and  became  a  national  association  on  February  25,  1865.  Before 
its  conversion  into  the  national  system  it  had  the  reputation  of 
having  been  a  strong,  successful  and  conservatively  managed 
institution.  The  capital  of  this  bank  was  $200,000  and  its 
deposits  were  nearly  $500,000.  It  was  not  a  large  bank,  but 
for  rascality  of  management  it  has  not  been  surpassed. 

For  some  time  before  its  failure  it  was  known  by  the  Comp- 
troller's office  to  have  been  freely  rediscounting  its  bills  receiv- 
ables and  otherwise  borrowing  money.  The  national  banking  laws 
limited  the  liabilities  of  a  bank  for  borrowed  money  to  an  amount 
not  exceeding  the  capital  stock  of  the  association.  When  the 
reports  of  the  bank  examiner  showed  that  the  liabilities  of  this 
bank  of  the  nature  indicated  largely  exceeded  the  capital  of  the 
association,  strenuous  measures  were  resorted  to  to  secure  a 
reduction  of  the  amount  to  at  least  the  legal  limit.  There  was 
no  evidence  furnished  or  obtainable  upon  which  to  base  a  sus- 
picion that  the  bank  was  insolvent,  and  without  such  evidence, 
or  well-grounded  suspicion,  the  Comptroller  had  no  authority 
under  the  law  to  close  and  take  possession  of  the  association. 
The  bank  was  practically  in  charge  of  an  examiner  for  some  time 
before  it  was  closed,  for  the  sole  purpose  of  securing  a  reduction 
in  the  large  line  of  rediscounts,  and  it  was  supposed  that  reason- 
able progress  was  being  made  in  this  connection,  when  it  was 
discovered  that  the  books  of  the  bank  did  not  reflect  its  true 
condition  in  respect  to  the  extent  of  these  liabilities.  The  exam- 
iner was  then  promptly  instructed  to  close  its  doors  pending  a 
thorough  investigation  to  determine  its  true  condition. 

On  November  12,  1906,  the  date  of  the  last  report  of  con- 
dition made  by  the  bank  previous  to  the  date  of  its  closing,  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  275 

notes  and  bills  rediscounted  were  reported  as  $349,474.61,  or 
$149,474.61  in  excess  of  the  capital  stock  of  the  association,  and 
the  amount  due  to  banks  and  bankers  was  shown  to  be  only 
$3,674.71. 

Upon  taking  charge  of  the  bank  one  month  later,  the  exam- 
iner who  had  been  appointed  temporary  receiver,  found  that  the 
rediscounts  were  several  hundred  thousand  dollars  greater  than 
the  amount  reported  and  that  the  books  of  the  bank  were  so 
grossly  falsified  as  to  be  wholly  unreliable.     Numerous  notes  were 
presented  to  the  receiver  soon  after  his  appointment,  bearing  the 
endorsement  of  the  Farmers  and  Drovers  National  Bank,  which 
had  been  rediscounted  in  good  faith  by  other  banks,  but  did  not 
appear  as  a  liability  of  the  Waynesburg  bank  upon  its  books. 
Several  months  before  this  bank  was  closed,  information  v%-as 
received  by  the  Comptroller  from  outside  sources  that  the  bank 
was  borrowing  money  freely  and  that  its  published  reports   of 
condition  did  not  correctly  show  these  liabilities.     The  examiner 
was   advised   of   this   fact   and   instructed   to   make   a   thorough 
investigation  of  the  bank's  condition  in  this  respect.     His  exam- 
ination covered  a  period  of  from  twelve  to  fourteen  days.     At 
the  commencement  of  this  examination  the  cashier,  who  was  the 
sole  manager  of  the  bank,  informed  him  that  the  bank  had  no 
liabilities  for  rediscounts  other  than  those  shown  by  its  books. 
During  the  progress  of  this  examination  evidence  was  obtamed 
through  the  examination  of  other  banks,  which  completely  refuted 
this  statement  of  the  cashier.    When  he  was  confronted  with  the 
evidence  of  these  rediscounts  and  asked  why  they  did  not  appear 
upon  the  books  of  the  bank,  the  cashier  produced  a  private  book 
which  he  kept  in  his  desk,  the  existence  of  which  was  previously 
unknown  to  the  examiner.    An  examination  of  this  record  showed 
rediscounts  largely  in  excess  of  those  theretofore  discovered  by 
the  examiner,  but  even  this  record  did  not  contain  a  complete  list 
of  such  liabilities.     Outside  investigation  was  continued  by  the 
examiner,  without  any  clue  or  assistance  from  the  cashier,  until 
liabilities  for  rediscounts  were  uncovered  aggregating  the  enor- 
mous sum  of  nearly  $620,000,  not  a  dollar  of  which  appeared 
upon  the  books.     One  of  the  cashier's  plans   of  operation  was 
to  make  a  deposit  with  a  bank,  shift  all  balances  to  that  bank, 


276  ROMANCE  AND  TRAGEDY  OF  BANKING 

then  borrow  from  it  as  much  as  possible,  checking  out  the  account 
and  leaving  an  overdraft. 

When  this  condition  of  affairs  was  discovered  by  the  exam- 
iner he  required  the  cashier  to  give  the  bank  security  in  the  nomi- 
nal value  of  at  least  three  hundred  thousand  dollars  to  cover 
any  losses  on  the  rediscounted  paper,  or  any  liabilitity  of  the 
cashier  individually  resulting  from  his  acts. 

While  the  cashier  was  criminally  liable  under  the  law  for 
falsification  of  the  books  of  the  bank  and  reports  made  to  the 
Comptroller,  there  was  no  evidence  of  insolvency  of  the  associa- 
tion, and  there  was  no  reason  to  believe  at  that  time  that  the 
rediscounted  paper  was  not  collectible.  But  as  the  cashier  was 
found  to  be  wholly  unreliable  and  unsafe,  the  next  and  only 
course  for  the  Comptroller  to  pursue  was  to  demand  his  resig- 
nation or  removal  from  the  bank,  pending  the  presentation  of  the 
evidence  of  criminal  violations  of  law  against  him  to  the  United 
States  Attorney  and  placing  the  bank  in  a  condition  to  with- 
stand the  effect  of  the  disclosures  which  would  follow  his  arrest. 
This  demand  was  promptly  made,  insisted  upon,  and  complied 
with  on  August  27,  1906,  but  was  not  carried  out  in  good  faith 
by  the  directors  of  the  bank,  who,  secretly  and  without  the  knowl- 
edge of  the  examiner  or  the  Comptroller,  elected  him  vice-presi- 
dent of  the  association,  and  continued  him  in  a  position  which 
enabled  him  to  still  carry  on  his  nefarious  operations,  and  it  was 
not  known  by  the  Comptroller  that  this  action  had  been  taken 
by  the  board  until  the  name  of  this  cashier  appeared  as  vice- 
president  in  the  next  report  of  condition  of  the  bank  made  some 
time  later. 

Under  such  a  condition  of  affairs,  with  deception  practiced 
upon  him  at  every  turn,  and  the  records  of  the  bank's  trans- 
actions wholly  unreliable,  it  was  absolutely  impossible  for  the 
examiner  to  determine  the  true  condition  of  this  bank  during  its 
active  existence,  and  it  was  months  after  the  association  had  been 
placed  in  the  hands  of  a  receiver  before  the  extent  of  its  lia- 
bilities on  rediscounted  paper  could  be  definitely  ascertained,  and 
then  only  through  the  slow  process  of  awaiting  the  filing  and 
proving  of  claims  of  creditors. 


ROMANCE  AND  TRAGEDY  OP  BANKING  277 

Many  of  the  notes  fqund  in  the  bank  were  later  proven  to  be 
forgeries  when  presented  by  the  receiver  for  collection,  and  a 
number  of  those  that  were  genuine  were  claimed  by  the  makers 
to  have  been  paid  at  maturity,  but  were  carelessly  left  in  the 
bank  after  payment,  thus  demonstrating  the  loose  methods  which 
prevailed,  not  only  on  the  part  of  the  bank  in  the  conduct  of 
its  business  but  by  some  of  its  customers  in  their  dealings  with 
the  institution. 

Much  of  the  rediscounted  paper  that  was  not  forged  was  in 
the  names  of  makers  who  were  financially  irresponsible  and  con- 
sequently was  uncollectible. 

As  is  usual  in  such  cases,  the  examiner  and  the  Comptroller 
were  severely  criticised  and  censured  for  not  discovering  during 
the  active  existence  of  this  bank  the  conditions  which  were  dis- 
closed subsequent  to  its  closing,  and  the  Comptroller  was  charged 
with  having  a  knowledge  of  these  facts  for  months  before  he  took 
possession  of  the  association. 

Mr.  Ridgely  was  Comptroller  at  the  time  and  the  criticisms 
referred  to  were  directed  against  him.  It  was  charged  editorially 
by  some  of  the  newspapers  that  the  bank  was  permitted  to  con- 
tinue in  business  long  after  it  was  known  by  the  Comptroller  to 
be  in  a  most  unsatisfactory  condition,  in  order  to  subserve  the 
interests  of  some  of  the  officials  of  the  bank  who  were  candidates 
for  political  office  at  the  approaching  election.  Allegations  of 
this  character  and  of  a  similar  nature  are  usually  without  any 
foundation  in  fact,  and  display  the  ignorance  or  malice  of  those 
responsible  for  them. 

Whenever  a  national  bank  fails,  no  matter  from  what  cause, 
the  examiner  and  the  administrative  officials  charged  with  the 
duty  of  supervising  the  banks  are  criticised  with  more  or  less 
severity  by  the  press  and  the  public  in  general  and  by  the  depos- 
itors and  stockholders  of  the  failed  institution  in  particular. 
The  examiner  is  usually  held  responsible  for  not  promptly  discov- 
ering and  reporting  the  unsatisfactoi-y  conditions  which  led  to 
the  failure,  or  administrative  officials  are  censured  for  undue 
leniency,  while,  as  a  rule,  the  facts  are  that  there  was  neither 
negligence  nor  incompetency  on  the  part  of  the  examiner  nor 
undue  forbearance  on  the  part  of  the  supervising  officials.     As 


278  ROMANCE  AND  TRAGEDY  OF  BANKING 

before  stated,  sincere  and  intelligent  criticism  of  the  manner  in 
Avhich  public  officials  discharge  their  duties  are  generally  whole- 
some and  productive  of  beneficial  results,  but  erroneous  criticism 
is  not  only  harmful  in  its  effect  but  is  unjust  to  those  against 
whom  it  is  directed,  and  when  applied  to  bank  examiners  or  to 
those  charged  with  the  administration  of  the  banking  laws,  is 
generally  based  upon  ignorance  or  misconception  of  the  law,  or 
the  facts,  or  both,  and  is  therefore  misleading  and  accomplishes 
no  good  purpose.  Bank  examiners  are  not  infallible,  and  they 
do  not  always  discover  and  size  up  a  condition  as  it  really  exists, 
but  instances  of  this  kind  are  the  exceptions  and  not  the  rule. 
Their  estimates  as  to  the  real  condition  of  a  bank  are  generally 
reasonably  accurate.  Their  powers  are  limited.  They  may  sug- 
gest where  they  have  no  authority  to  direct,  and  if  their  advice 
or  suggestions  were  followed  by  bank  officers  they  would  always 
be  found  to  be  on  the  side  of  safety  and  in  the  interest  of  good 
banking. 

Ridgely's  Policies  of  Administration 

Mr.  Ridgely's  administration  of  the  Comptroller's  office  was 
not  characterized  by  any  spectacular,  sensational,  or  demagogic 
methods.  His  policy  was  to  require  the  banks  to  observe  the  law 
and  to  enforce  such  observance  by  every  lawful  means  within  his 
power.  He  respected  the  law  himself  and  did  not  exceed  his 
statutory  authority  in  dealing  with  the  banks  by  an  arbitrary 
assumption  of  powers  which  the  law  did  not  confer  upon  him. 
Neither  did  he  seek  to  evade  responsibility  or  criticism  by  throw- 
ing the  blame  upon  the  examiner  when  the  examiner  was  not  at 
fault.  He  invariably  supported  the  examiner  in  his  efforts  to 
honestly  and  courageously  perform  his  duty,  and  the  examiners 
who  served  under  him  were  confident  that  they  would  receive  such 
support  no  matter  what  influences  might  operate  against  them. 
He  applied  the  same  rules  of  supervision  and  construction  of  the 
law  to  all  banks  alike,  large  and  small,  without  distinction  and 
without  fear  or  favor.  He  recognized  the  defects  in  the  statutes, 
so  far  as  enforcible  remedies  were  concerned,  but  did  not  arro- 
gate to  himself  legislative  powers  by  the  adoption  of  unauthor- 
ized administrative  regulations.     He  administered  the  law  as  he 


ROMANCE  AND  TRAGEDY  OF  BANKING  279 

found  it  on  the  statute  books  and  not  as  he  thought  it  should 
be.  Its  defects  he  recognized  and  pointed  out  to  Congress  and 
suggested  the  remedies,  as  the  law  requires  the  Comptroller  to 
do  in  his  annual  report  to  that  body,  and  until  such  remedies 
were  supplied  by  legislative  enactment  he  was  content  in  the 
consciousness  of  having  performed  his  duty,  regardless  of  criti- 
cism, confident  that  any  investigation  of  his  official  course  would 
sustain  him  and  place  the  responsibility  where  it  belonged. 

An  investigation  of  Mr.  Ridgely's  course  of  action  in  con- 
nection with  the  Farmers  and  Drovers  National  Bank  of  Waynes- 
burg,  or  any  other  failed  bank  during  his  administration  of  the 
Comptroller's  office,  will  show  no  just  grounds  for  criticism. 

Rinehart,  the  cashier  of  this  bank,  who  was  responsible  for 
the  wrecking  of  the  institution,  was  indicted,  convicted  and  sen- 
tenced to  a  term  of  twelve  years  in  the  penitentiary,  but  only 
partially  paid  the  penalty  for  his  crime.  He  was  pardoned  by 
a  too  merciful  President  before  serving  out  his  term. 

The  losses  on  assets  sold  and  compounded  under  order  of  the 
court  amounted  to  $1,356,281.90.  The  stockholders  were 
assessed  one  hundred  per  cent,  on  their  stock  holdings,  of  which 
amount  $149,271  was  collected.  The  creditors  have  received 
dividends  aggregating  sixty  per  cent,  of  their  claims,  amounting 
to  $1,050,121. 

The  Crisis  of  1907 

For  ten  or  twelve  years  immediately  preceding  the  panic  of 
1907,  there  was  a  steady  increase  in  prices  generally  and  in  all 
forms  of  commercial  and  industrial  activities,  legitimate  and 
speculative.  Large  sums  of  money  were  required  and  used  in  the 
development  and  equipment  of  railroads,  oil  and  mining  prop- 
erties, and  manufacturing  and  business  undertakings  generally, 
and  large  blocks  of  stocks  and  bonds  of  a  highly  speculative 
character  were  forced  upon  the  market,  a  considerable  portion 
of  which  were  of  a  fraudulent  and  criminal  nature. 

It  was  impossible  under  such  a  condition  of  affairs  to  draw 
the  line  absolutely  between  legitimate  and  conservative  enter- 
prises and  speculative  ventures  which  absorbed  credits  and  tied 
up  in  the  form  of  fixed  and  unproductive  investments  such  a  large 


280  ROMANCE  AND  TRAGEDY  OF  BANKING 

proportion  of  the  working  capital  of  the  country  that  there  was 
not  sufficient  left  to  meet  the  demands  of  legitimate  business  and 
to  finance  the  enterprises  which  had  been  undertaken. 

As  is  usual  under  such  conditions,  the  tightening  of  the  money 
market  was  the  first  symptom  of  approaching  danger  and  the 
first  indication  of  liquidation  manifested  itself  in  the  stock  market 
by  a  decline  in  stock  and  bond  quotations.  Loans  became  diffi- 
cult to  obtain  or  to  renew,  and  interest  rates  increased. 

It  was,  of  course,  natural,  and  probably  inevitable,  that  under 
such  a  condition  of  expansion  it  required  only  an  incident  to 
produce  or  precipitate  a  first-class  panic,  involving  not  only 
speculative  and  fraudulent  ventures,  but  also  legitimate  and  con- 
servative undertakings  as  well. 

The  immediate  incident  which  precipitated  the  panic  of  1907 
was  the  collapse  of  the  corner  in  the  stock  of  the  United  States 
Copper  Company,  which  had  been  engineered  by  the  firm  of  Otto 
Heinze  &  Company,  composed  of  the  brothers  and  associates  of 
F.  Augustus  Heinze,  of  Montana.  In  the  summer  of  1907,  F. 
Augustus  Heinze  made  his  appearance  upon  the  financial  stage 
in  New  York  City,  having  obtained  control  of  enough  stock  of 
the  Mercantile  National  Bank  of  that  city  to  secure  his  election 
to  the  presidency  of  that  institution. 

The  Mercantile  National  Bank  was  a  very  old  and  reputable 
institution.  It  was  originally  organized  as  a  State  Bank  in  1850, 
under  the  name  of  the  Mercantile  Bank,  and  was  converted  into 
a  national  association  April  15,  1865,  under  the  title  The  Mer- 
cantile National  Bank.  The  capital  stock  of  this  association  at 
the  time  Heinze  secured  control  was  $3,000,000.  Its  total  re- 
sources and  liabilities  were  $31,359,358  respectively,  and  its 
deposit  liabilities  were  over  $22,000,000. 

After  acquiring  control  of  the  management  of  this  bank 
Heinze  appears  to  have  employed  the  resources  of  the  institution 
to  a  considerable  extent  in  furtherance  of  his  copper  enterprises 
and  speculations,  until  the  creditors  of  the  bank  became  sus- 
picious and  distrustful  of  his  operations  and  commenced  to  with- 
draw their  funds.  The  failure  of  the  copper  corner  brought 
matters  to  a  crisis,  and  the  bank,  being  unable  to  meet  its  clear- 
ings, was  compelled  to  appeal  to  the  Clearing  House  Association 


ROMANCE  AND  TRAGEDY  OF  BANKING  281 

for  assistance.  An  examination  of  the  association  was  made  by 
a  committee  of  the  Clearing  House  for  the  purpose  of  determin- 
ing its  condition,  which  showed  that  it  was  not  only  solvent,  but 
had  a  large  surplus  intact  after  eliminating  every  loan  to  the 
Heinze  interests  which  was  considei'ed  doubtful  or  worthless.  The 
Clearing  House  Association  therefore  determined  to  support  the 
bank,  upon  the  condition  that  Heinze  and  his  entire  board  of 
directors  would  resign  and  retire  from  the  management  of  the 
association.  On  the  morning  of  October  21,  1907,  the  bank 
opened  for  business  under  an  entirely  new  board  of  directors, 
Heinze  and  his  associates  having  been  eliminated.  The  support 
of  the  Clearing  House  Association,  however,  did  not  prove  suf- 
ficient. Withdrawals  continued,  and  a  run  was  started  upon  the 
Knickerbocker  Trust  Company,  which  was  believed  to  be  in  a 
badly  extended  condition  and  was  under  suspicion  because  of  the 
relations  of  its  president,  Charles  T.  Barney,  with  Charles  W. 
Morse  in  his  speculations. 

The  capital  of  the  Trust  Company  was  $1,200,000,  and  its 
deposits  were  over  $48,000,000.  The  run  upon  this  institution 
continued  with  such  persistency  that  the  company  was  compelled 
to  close  its  doors  on  October  22.  The  suspension  of  this  insti- 
tution seriously  aggravated  the  situation  and  added  to  the  spirit 
of  unrest  which  prevailed,  resulting  in  protracted  runs  upon  a 
number  of  banks  and  trust  companies,  and  the  failure  of  ten 
State  banks,  two  trust  companies  and  one  national  bank  in  New 
York  City  and  vicinity.  The  Mercantile  National  Bank  was 
unable  to  recover  from  the  strain  to  which  it  was  subjected 
under  the  Heinze-Morse  regime  and  was  compelled  to  go  into 
voluntary  liquidation  in  January  following. 

These  successive  failures  led  to  the  issuing  of  Clearing  House 
certificates  by  the  New  York  City  banks,  and  similar  action  was 
followed  by  nearly  all  the  banks  in  all  the  large  cities  throughout 

the  country.  xt       v    v 

If  this  banking  crisis  had  not  been  precipitated  in  New  York 
City  by  the  suspicion  and  distrust  of  Heinze,  Morse  and  their 
associates,  although  conditions  were  ripe  for  a  panic,  it  is  reason- 
able to  assume  that  the  liquidation  that  had  been  going  on  m  the 
stock  market  would  have  proceeded  more  slowly  and  quietly  and 


282    ROMANCE  AND  TRAGEDY  OF  BANKING 

that  nothing  more  serious  than  a  gradual  decline  in  business 
activities  would  have  occurred,  instead  of  the  widespread  panic 
which  followed. 


Aetna  Banking  and  Trust  Company  of  Butte,  Mont. 

F.  Augustus  Heinze  had  also  been  connected  with  the  Aetna 
Banking  and  Trust  Company  of  Butte,  Mont.,  which  had  a 
branch  office  in  Washington,  D.  C.  This  branch  had  been  in 
operation  for  some  time  before  banks  in  the  District  of  Columbia, 
other  than  national  and  trust  companies,  organized  under  Fed- 
eral laws,  were  placed  under  the  supervision  of  the  Comptroller 
of  the  Currency.  When  all  banks  in  the  District  of  Columbia, 
no  matter  under  what  authority  organized,  were  by  Act  of  Con- 
gress placed  under  the  Comptroller's  supervision,  the  Washing- 
ton branch  of  the  Aetna  Bank  and  Trust  Company  was  the  first 
of  this  class  of  banks  to  be  examined  by  the  national  bank  exam- 
iner, because  of  numerous  inquiries  the  Comptroller  had  previ- 
ously received  from  time  to  time  as  to  its  financial  standing  and 
methods  of  operation. 

It  did  not  take  the  examiner  more  than  a  half  hour  after 
entering  the  bank  to  discover  that  it  was  not  only  hopelessly 
insolvent,  but  that  its  operations  were  fraudulent  in  the  extreme 
and  criminal,  and  the  examiner  was  instructed  to  immediately 
close  its  doors  and  take  possession  of  its  assets,  if  any  could  be 
found,  pending  his  appointment  as  receiver. 

By  the  Act  of  Congress  approved  June  25,  1906,  amendatory 
of  the  Code  of  the  District  of  Columbia,  all  banks  and  trust  com- 
panies organized  under  the  laws  of  any  of  the  States  of  the  Union, 
having  an  office  or  banking  house  located  within  the  District  of 
Columbia,  for  the  receipt  of  deposits  or  savings,  were  made  sub- 
ject to  the  provisions  of  the  national  banking  laws  in  respect  to 
making  and  publishing  reports  of  condition,  the  same  as  national 
banks  are  required  to  make  and  publish,  and  the  Comptroller 
was  authorized  to  examine  and  take  possession  of  any  such  bank, 
company  or  corporation,  for  the  same  reasons  and  in  the  same 
manner  that  he  was  authorized  to  examine  and  take  possession 
of  a  national  bank. 


KOMANCE  AND  TRAGEDY  OF  BANKING  283 

As  the  Aetna  Banking  and  Trust  Company  was  not  a  national 
bank,  and  did  not  operate  under  the  national  banking  laws,  it 
was  necessary  to  prepare  a  special  form  of  commission  in  appoint- 
ing a  receiver  for  the  Washington  branch,  and  the  Comptroller's 
counsel  was  instructed  to  prepare  a  form  that  would  meet  the 
requirements  of  law. 

After  looking  into  the  law  on  the  subject,  counsel  advised  the 
Deputy  Comptroller,  who  at  that  time  was  acting  Comptroller, 
that  he  had  no  authority  under  the  law  to  appoint  a  receiver  for 
the  branch  bank,  unless  he  was  satisfied  that  the  parent  bank  at 
Butte,  Mont.,  was  insolvent,  as  the  parent  bank  Avas  liable  for 
the  debts  of  the  branch,  and  if  the  former  was  solvent,  the  branch 
was  not  insolvent. 

The  Deputy  Comptroller  advised  his  counsel  that  he  did  not 
know  what  the  condition  of  the  parent  bank  at  Butte  was,  but  he 
did  know  that  the  Washington  branch  was  nothing  but  a  fraud, 
and  a  swindle  upon  the  people  of  Washington,  who  were  deposit- 
ing their  money  in  it,  and  that  it  was  his  purpose  to  place  it  in 
the  hands  of  a  receiver. 

Counsel  replied  that  there  was  no  doubt  of  the  fraudulent 
character  of  the  branch,  and  that  it  ought  to  be  placed  in  charge 
of  a  receiver,  but  as  counsel  for  the  Comptroller,  he  said  he  must 
advise  him  that  he  had  no  authority  to  appoint  a  receiver,  except 
under  the  conditions  stated. 

The  Deputy  Comptroller  said  that  he  would  assume  responsi- 
bility for  appointing  a  receiver,  and  leave  it  to  the  parent  bank 
to  question  or  dispute  the  legality  of  his  action,  and  instructed 
his  counsel  to  go  ahead  and  prepare  the  commission. 

A  receiver  was  appointed,  and,  within  an  hour  afterward, 
advice  was  received  by  wire  that  the  parent  bank  at  Butte  had 

been  closed. 

The  Deputy  Comptroller  immediately  wired  the  national  bank 
examiner  who  covered  that  territory  to  go  to  Butte  and  take 
possession  of  the  parent  bank  in  the  name  of  the  Comptroller  of 
the  Currency,  and  that  he  would  appoint  him  receiver  upon 
receipt  of  advice  that  he  had  taken  charge  of  the  bank. 

The  Comptroller's  counsel  advised  him  that  he  had  no  author- 
ity to  take  possession  of  a  State  bank.    The  Deputy  ComptroUer 


284  ROIMANCE  AND  TRAGEDY  OF  BANKING 

replied  that  he  would  let  the  State  authorities  raise  that  question. 

Upon  receipt  of  a  wire  from  the  national  bank  examiner  that 
he  had  arrived  at  Butte  and  had  taken  possession  of  the  bank, 
the  Deputy  Comptroller  wired  him  to  immediately  forward  to 
the  Treasurer  .of  the  United  States,  for  credit  of  the  Comptroller 
of  the  Currency,  for  account  of  the  creditors  of  the  Aetna  Bank- 
ing and  Trust  Company,  all  the  cash  in  the  bank,  the  purpose 
being  to  remove  these  funds  from  the  jurisdiction  of  the  State 
authorities,  in  order  that  in  the  liquidation  of  the  affairs  of  the 
bank,  the  Washington  creditors  might  be  assured  that  they  would 
receive  their  share  of  any  dividend  that  might  be  paid. 

Up  to  this  stage  of  the  proceedings  neither  the  bank  officials 
nor  any  of  the  State  authorities  had  questioned  the  right  of  the 
Comptroller  to  take  possession  of,  and  appoint  a  receiver  for  the 
Aetna  Banking  and  Trust  Company,  but  several  months  later, 
in  a  suit  brought  by  the  receiver  against  the  Bank  of  Discount 
of  the  City  of  New  York,  to  recover  a  sum  of  money  due  his 
trust,  the  question  was  raised  by  the  defendant  as  to  the  authority 
of  a  receiver  appointed  by  the  Comptroller  of  the  Currency,  for 
a  State  banking  corporation,  having  an  office  or  branch  in  the 
District  of  Columbia,  to  sue  in  the  Circuit  Court  of  the  United 
States,  for  moneys  due  or  property  belonging  to  such  banking 
corporation,  when  such  debt  is  due  from  or  the  property  is  iti  the 
possession  of  persons  outside  of  the  District  of  Columbia. 

It  was  contended  by  the  counsel  for  the  receiver,  that  if  such 
a  doctrine  should  be  allowed  to  prevail,  all  that  was  necessary  for 
a  banking  corporation  doing  business  in  the  District  of  Columbia 
to  do,  to  render  the  Act  of  Congress  ineffective,  was  to  remove 
its  assets  over  the  line  into  Maryland  or  Virginia,  and  the  receiver 
would  then  be  powerless  to  recover.  In  such  an  event  the  cred- 
itors of  the  bank  residing  in  the  District  would  be  compelled  to 
institute  suit  in  the  State  in  which  the  bank  was  incorporated, 
and  follow  the  assets  as  best  they  could. 

The  court  very  properly  held  that  if  a  banking  corporation 
organized  under  the  laws  of  a  State,  saw  fit  to  go  into  the  Dis- 
trict of  Columbia,  and  there  to  do  business,  it  must  conform  to 
the  laws  of  the  District,  and  in  case  it  did  not,  and  became  insol- 
vent, the  Comptroller  could   so  declare  and   appoint  a   receiver 


ROMANCE  AND  TRAGEDY  OF  BANKING  285 

of  all  its  assets,  no  matter  where  located,  and  apply  such  assets 
according  to  the  provisions  of  the  laws  of  the  United  States  to 
the  satisfaction  of  the  claims  of  all  the  corporation's  creditors. 
The  court  declared  that  Congress  intended  that  the  Comptroller 
should  have  the  right  to  appoint  a  receiver  for  the  corporation, 
and  not  only  for  the  branch  doing  business  in  the  District  of 
Columbia,  and  that  under  such  authority,  the  receiver  had  the 
right  to  take  possession  of  the  assets  of  the  corporation  wherever 
situated. 

This  decision  of  the  court,  therefore,  sustained  the  position 
taken  by  the  Deputy  Comptroller  in  the  beginning,  contrary  to 
the  advice  of  his  counsel. 

Returning  to  the  panic  of  1907,  from  which  this  discussion 
somewhat  digressed,  the  results  of  this  crisis  demonstrated  that 
the  national  banks  in  New  York  City  were  in  a  very  much 
stronger  condition  than  the  trust  companies  or  State  banks. 
There  were  no  other  failures  of  national  banks  in  New  York  than 
those  mentioned.  The  First  National  Bank  of  Brooklyn  was 
forced  to  close  its  doors  on  October  25,  1907,  on  account  of  the 
failure  of  the  Williamsburg  Trust  Company  and  the  Jenkins 
Trust  Company,  of  which  latter  company,  the  First  National 
was  the  Clearing  House  agent. 

The  suspension  of  the  First  National  Bank  of  Brooklyn  was 
made  necessary  in  order  to  avoid  the  liabilities  which  would  have 
accrued  from  checks  of  the  Trust  Company  being  presented  for 
payment  to  the  national  bank  through  the  Clearing  House.  These 
two  trust  companies  were  largely  indebted  to  the  First  National 
Bank,  but  the  bank  reorganized  shortly  after  its  suspension  and 
resumed  business   February  4,   1908,   and  became   a  flourishmg 

institution.  . 

The  weak  point  in  the  situation  in  New  York  City  during  this 
crisis  was  the  vulnerability  of  the  trust  companies  which  had 
been  receiving  commercial  deposits  and  not  carrying  against  them 
commercial  bank  reserves.  This  question  of  reserves  had  been  a 
matter  of  controversy  between  the  banks  and  the  trust  compames 
for  years,  and  this  panic  demonstrated  absolutely  the  correctness 
of  the  contention  of  the  Clearing  House  banks  that  trust  compa- 
nies should  carry  a  cash  reserve  against  commercial  deposits  the 


286  ROMANCE  AND  TRAGEDY  OF  BANKING 

same  as  commercial  banks  are  required  to  carry,  and  led  to  the- 
enactment  of  the  law  of  1908,  requiring  trust  companies  in  New- 
York  City  to  maintain  a  reserve  of  fifteen  per  cent,  on  demand 
deposits. 

The  reports  of  the  Comptroller  of  the  Currency  do  not  con- 
tain complete  information  as  to  the  number  of  failures  of  bank- 
ing institutions  other  than  national,  as  a  result  of  this  panic,  but 
approximately  practically  thirty-one  trust  companies  and  State 
banks  closed  their  doors  in  New  York  City  and  vicinity,  while 
only  two  national  banks  were  closed  in  the  city  and  one  in 
Brooklyn. 

The  same  conditions  existed  throughout  the  country  in 
respect  to  national  associations.  Cash  payments  were  suspended 
largely  in  some  places  and  entirely  in  others,  and  the  banks  gen- 
erally resorted  to  the  use  of  Clearing  House  certificates  in  the 
settlement  of  transactions  between  themselves,  and  all  forms  of 
scrip  were  used  as  substitutes  for  money  in  dealing  with  their 
customers.  Cash  reserves  accumulated  in  the  banks,  reaching  in 
some  instances  as  high  as  fifty  per  cent,  of  the  deposit  liabilities. 
The  effect  of  this  money  hoarding,  which  was  more  prevalent 
among  the  banks  than  with  individuals,  was  a  money  famine 
everywhere  and  a  general  paralysis  of  business. 

A  peculiar  feature  of  this  panic  was  that  while  it  started  in 
New  York  City,  through  the  lack  of  confidence  of  the  public  in 
certain  banks,  it  spread  over  the  country  through  a  lack  of  con- 
fidence of  the  banks  in  each  other,  or  rather  a  knowledge  of  their 
inability  to  obtain  from  their  city  correspondents  the  balances 
that  were  due  them. 

This  latter  phase  of  the  situation  was  attributable  to  our 
defective  reserve  laws,  which  permitted  country,  or  what  were 
known  as  fifteen  per  cent,  reserve  banks,  to  count  as  lawful  money 
reserve  nine  per  cent,  in  balances  due  them  from  approved  reserve 
agents  in  reserve  and  central  reserve  cities,  and  twenty-five  per 
cent,  reserve  banks  to  count  as  reserve  twelve  and  one-half  per 
cent,  in  balances  due  them  from  approved  reserve  agents  in  cen- 
tral reserve  cities. 

The  panic  of  1907  clearly  demonstrated  both  to  the  banks 
and  the  public  that  this  so-called  reserve  was  not  reserve  at  all. 


ROMANCE  AND  TRAGEDY  OF  BANKING  287 

as  it  was  not  available  on  demand,  and  the  accumulation  of  this 
large  amount  of  money  in  New  York  City  banks,  which  at  the 
time  of  the  panic  aggregated  $242,236,850,  was  the  means  of 
spreading  over  the  entire  country  a  currency  disturbance  which 
might  otherwise  have  been  confined  to  New  York  City  alone,  or 
at  least  to  that  vicinity. 

Notwithstanding  the  severity  of  this  panic  from  October  1, 
1907,  to  January  31,  1908,  only  twelve  national  banks  failed 
throughout  the  entire  country,  and  more  than  half  of  these  fail- 
ures were  due  to  causes  having  no  direct  connection  with  the 
panic. 

Defective  as  our  national  banking  laws  were  in  respect  to 
reserve  privileges  and  requirements,  and  difficult  as  it  was  for  the 
Comptroller  of  the  Currency  to  compel  the  banks  under  the  most 
favorable  circumstances  to  maintain  at  all  times  the  reserve 
required,  this  difficulty  was  made  more  perplexing  during  Mr. 
Ridgely's  administration  by  the  action  of  the  then  Secretary  of 
the  Treasury,  Leslie  M.  Shaw,  who,  without  warrant  of  law, 
excepted  United  States  deposits  from  reserve  requirements,  when 
the  statute  plainly  required  a  reserve  to  be  carried  "on  deposits 
in  every  respect." 

While  Congress  subsequently  legalized  the  action  of  the  Sec- 
retary of  the  Treasury  by  amending  the  law  to  except  Govern- 
ment deposits  from  reserve  computations,  this  fact  did  not  make 
the  Secretary's  action  any  the  less  unlawful  at  the  time. 

It  is  true  that  there  never  was  any  real  necessity  for  carrying 
a  reserve  on  Government  deposits,  such  deposits  being  specially 
secured  by  United  States  bonds  held  by  the  Treasury  Depart- 
ment. At  the  time  the  Secretary  made  this  exception,  however, 
the  law  made  no  distinction  between  Government  and  any  other 
deposits,  but  required  reserve  to  be  carried  against  all  deposits 
of  every  kind  and  class.  Therefore,  the  Secretary  of  the  Treas- 
ury had  no  authority  to  assume  legislative  powers  and  relieve  the 
banks  from  the  statutory  requirement  of  maintaining  a  reserve 
on  such  deposits. 

But  contrary  to  law  as  the  Secretary's  action  was  in  this 
respect,  his  subsequent  attitude,  as  disclosed  by  his  public  utter- 


288  ROMANCE  AND  TRAGEDY  OF  BANKING 

ances  and  private  conferences  with  bankers  on  the  reserve  ques- 
tion, was  much  more  so. 

In  an  address  before  the  bankers  of  the  District  of  Columbia 
and  Maryland  he  advised  them  to  use  their  reserves  whenever 
they  had  a  pressing  demand  for  loans.  This,  he  said,  in  sub- 
stance, was  what  a  bank's  reserve  was  for,  and  not  to  be  locked 
up  in  the  bank's  vaults  when  the  business  needs  of  their  respective 
communities  demanded  money. 

This  was  a  most  peculiar  statement  for  the  Secretary  of  the 
Treasury  to  make,  especially  in  the  face  of  the  provision  of  law 
which  prohibited  a  national  bank  from  making  any  loan  when 
the  lawful  money  reserve  was  below  the  legal  requirement,  and 
also  prohibited  the  declaration  of  any  dividends  while  the  reserve 
was  deficient.  , 

The  Secretary  of  the  Treasury  had  no  direct  supervision  of 
the  national  banks.  That  power  was  vested  in  the  Comptroller 
of  the  Currency.  If  a  bank  neglected  or  refused  to  make  good  a 
shortage  in  reserve  after  due  notice  from  the  Comptroller  to  make 
such  deficiency  good,  the  association  was  subject  to  a  receiver- 
ship, but  such  receiver  could  be  appointed  only  with  the  approval 
of  the  Secretary  of  the  Treasury.  This  was  the  only  exception 
in  the  banking  laws  which  required  the  concurrence  of  the  Secre- 
tary of  the  Treasury  in  the  appointment  of  a  receiver  for  a 
national  bank.  In  all  other  cases  the  sole  power  of  appointment 
was  vested  in  the  Comptroller  of  the  Currency. 

If,  therefore,  the  Secretary  of  the  Treasury  who  excepted 
public  deposits  from  reserve  requirements,  before  the  law  author- 
ized such  exception,  had  instructed  the  Comptroller  of  the  Cur- 
rency not  to  require  the  banks  to  carry  reserve  on  such  deposits, 
and  the  Comptroller,  in  recognition  of  the  requirements  of  law, 
and  in  the  exercise  of  his  authority  under  the  statute,  declined 
to  make  the  exception,  what  would  have  been  the  result.''  The 
Comptroller  would  have  had  no  power  to  enforce  the  penalty  for 
non-observance  of  the  statute,  as  the  Secretary  would  have  said 
to  him,  "If  you  require  the  banks  to  carry  reserve  against  Gov- 
ernment deposits  and  they  neglect  or  refuse  to  do  so,  I  will  not 
concur  in  the  appointment  of  a  receiver  for  such  banks,"  and 
there  the  matter  would  have  ended.     But  the  spectacle  was  pre- 


ROMANCE  AND  TRAGEDY  OF  BANKING  289 

sented  of  the  Comptroller  of  the  Currency  endeavoring  to  compel 
the  banks  to  observe  the  law,  and  the  Secretary  of  the  Treasury 
advising  them  not  to  do  so. 

A  few  days  before  the  Secretary  of  the  Treasury  made  the 
press  announcement  relieving  public  deposits  from  reserve  re- 
quirements, the  Comptroller  had  made  a  call  upon  the  national 
banks  for  a  report  of  condition,  and  the  reports  were  coming  in 
and  being  examined  and  abstracted.  The  Comptroller  had  given 
no  instructions  in  regard  to  changing  the  rule  in  respect  to  com- 
putation of  reserve,  and  public  deposits  were  being  included  in 
the  computation  as  usual.  A  correspondent  of  a  New  York  City 
newspaper  called  at  the  office  and  inquired  of  the  Deputy  Comp- 
troller what  was  being  done  in  regard  to  relieving  the  banks  from 
carrying  reserve  on  public  deposits.  The  deputy  informed  him 
that  there  had  been  no  change  in  the  law  or  the  rule  of  the  office 
in  that  respect.  On  this  information  the  correspondent  wired 
his  paper  a  sensational  despatch  to  the  effect  that  there  was 
friction  between  the  Comptroller  and  the  Secretary  in  regard  to 
reserve  requirements  and  that  the  former  had  overruled  the  latter. 
As  a  result  of  this  telegram  Wall  Street  passed  through  a  severe 
panic  for  about  twenty  minutes  in  the  last  hours  of  trading  on 
October  3,  1902. 

According  to  the  account  of  one  of  the  New  York  newspapers, 
the  news  from  Washington  was  so  disturbing  and  so  plausibly 
authentic  that  for  a  time  the  market,  which  had  been  firm  almost 
to  buoyancy,  was  suddenly  checked,  and  room  traders  and  specu- 
lators were  taken  completely  by  surprise.  Brokers  on  the  floor 
of  the  Stock  Exchange,  observing  the  sudden  check  in  orders  from 
their  offices,  started  to  make  inquiry  as  to  the  cause,  but  before 
they  could  do  so  were  overwhelmed  with  orders  to  sell.  Stocks 
dropped  from  one  to  five  points,  irrespective  of  value,  but  St. 
Paul  suffered  the  most.  The  Secretary  of  the  Treasury  was  ap- 
pealed to  for  a  confirmation  or  denial  of  the  report,  and,  after 
conference  with  the  Comptroller,  issued  the  following  statement : 

A  wholly  unfounded  report  appears  to  have  been  sent 
from  Washington  yesterday,  calculated  to  mislead  with 
reference    to    the    action    taken    by    the    Secretary    of    the 


290  ROMANCE  AND  TRAGEDY  OF  BANKING 

Treasury  relative  to  the  maintenance  of  reserve  against 
government   deposits    secured    by    government    bonds. 

That  there  may  be  no  misunderstanding  either  as  to 
the  law  or  the  action  taken  by  the  department,  the  banks 
are  advised  that  the  National  Bank  Act  lays  down  the  rule 
that  all  associations  shall  maintain  certain  reserve  against 
all  deposits,  failing  to  do  which,  the  Comptroller  of  the 
Currency  may,  with  the  concurrence  of  the  Secretary 
of  the  Treasury,  appoint  a   receiver. 

The  law,  therefore,  lays  down  the  rule  that  the  reserve 
shall  be  maintained,  but  lodges  a  discretion  with  the  Comp- 
troller and  with  the  Secretary  as  to  the  enforcement  of  the 
rule.  You  are  therefore  notified  that  the  rule  will  not  be 
enforced  so  far  as  it  relates  to  government  deposits  secured 
by  government  bonds. 

It  must  be  borne  in  mind  in  this  connection  that  it  is 
not  the  intention  of  the  department  to  encourage  increased 
credit.  On  the  contrary,  very  great  conservatism  should  be 
exercised.  But  it  is  the  desire  of  the  department  that  no 
worthy  business  interest  shall  suffer  simply  because  a  bank 
has  invested  its  money  in  government  bonds  to  secure 
government  deposits,  and  to  that  extent  has  relieved  the 
Treasury  Department  from  a  growing  surplus  and  thus 
restricted    its    capacity    to    extend    accommodations. 

While  the  law  vested  in  the  Secretary  of  the  Treasury  and  the 
Comptroller  of  the  Currency  discretionary  powers  in  regard  to 
the  appointment  of  a  receiver  for  a  bank  which  neglects  or  refuses 
to  maintain  the  legal  reserve,  there  was  no  authority  or  discre- 
tion vested  in  either  of  these  officers  at  that  time  to  except  de- 
posits, secured  or  unsecured,  from  the  reserve  requirements,  and 
if  the  Secretary  had  the  power  to  except  Government  deposits 
from  reserve,  simply  because  they  were  secured  by  Government 
bonds,  he  also  had  the  power  to  except  any  other  deposits  that 
were  satisfactorily  secured. 

The  most  creditable  phase  of  this  remarkable  disregard  of 
the  requirements  of  the  law  was  the  fact  that  the  New  York  City 
banks  declined  to  recognize  the  Secretary's  authority  to  make 
such  exception,  and  the  following  day  the  Clearing  House  Asso- 


RO^IANCE  AND  TRAGEDY  OF  BANKING  291 

elation  announced  that  twenty-five  per  cent,  reserve  would  be 
carried  upon  total  deposits,  the  same  as  usual,  without  exception. 

When  the  correspondent  who  was  responsible  for  sending  the 
sensational  message  which  caused  the  flurry  in  Wall  Street,  called 
at  the  Comptroller's  office  the  next  day,  he  was  asked  to  explain 
why  he  sent  such  a  despatch.  He  replied  that  he  did  so  upon  the 
authority  of  the  Deputy  Comptroller,  who  informed  him  that 
no  change  had  been  made  in  the  rule  for  computing  reserve,  and 
that  he  assumed  that  as  the  Secretary  had  announced  that  reserve 
would  no  longer  be  required  to  be  held  against  Government  de- 
posits and  as  the  Comptroller  was  still  including  such  deposits 
in  reserve  calculations,  there  must  necessarily  be  some  friction 
between  the  Comptroller  and  the  Secretary  on  the  subject,  and 
he  so  wired  his  paper. 

Up  to  the  time  the  Secretary  issued  the  statement  above 
quoted,  there  had  been  no  conference  between  him  and  the  Comp- 
troller on  this  subject.  The  Secretary  was  in  New  York  City 
at  the  time  he  made  the  first  announcement,  and  nothing  was 
known  in  the  Comptroller's  office  of  his  contemplated  action  ex- 
cept what  was  contained  in  the  newspapers. 

Life  of  Receiverships 

The  average  life  of  receiverships  of  national  banks  is  about 
four  years.  The  shortest  receivership  in  the  history  of  the 
national  system  was  that  of  the  Metropolitan  National  Bank  of 
Cincinnati,  Ohio.  This  bank  had  a  capital  of  $1,000,000.  The 
association  was  placed  in  the  hands  of  a  receiver  February  10, 
1888.  The  creditors  were  paid  in  full  within  thirty-five  days 
from  the  date  of  closing,  and  the  bank  was  turned  over  by  the 
receiver  to  an  agent  elected  by  the  stockholders,  with  remaining 
assets  of  the  nominal  value  of  $1,164,063. 

This  bank  was  not  insolvent  at  the  time  it  was  closed,  as  the 
speedy  liquidation  demonstrated,  but  it  was  in  a  very  weak  con- 
dition, due  to  an  inefficient  management.  The  officers  and  direc- 
tors were  heavy  borrowers  and  resorted  to  irregular  methods  to 
conceal  large  loans.  False  reports  of  condition  and  other  crimi- 
nal violations  of  law  were  discovered.     The  growing  distrust  of 


292  ROMANCE  AND  TRAGEDY  OF  BANKING 

the  depositors  in  the  management  of  the  institution  led  to  the 
adoption  of  a  resolution  by  the  board  of  directors  to  close  its 
doors,  with  the  results  above  described. 

The  most  prolonged  receivership  of  a  national  bank  was  that 
of  the  Third  National  Bank  of  Chicago,  111.  A  receiver  was 
appointed  for  this  bank  November  24,  1877,  but  its  affairs  were 
not  finally  closed  until  December  31,  1907,  thirty  years  after- 
ward, during  the  closing  months  of  Mr.  Ridgely's  administration. 
Within  five  years  after  the  bank  failed,  however,  the  receiver  had 
paid  the  creditors  in  full,  with  interest  from  the  date  of  closing. 

The  reasons  for  the  prolongation  of  this  receivership,  and  the 
unusual  results  attained  in  the  liquidation  of  the  trust,  were  that 
the  real  estate  in  and  around  Chicago  which  came  into  the  pos- 
session of  the  receiver,  enhanced  very  materially  in  value  with 
the  growth  of  the  city.  The  Act  of  June  30,  1876,  required  the 
Comptroller  to  call  a  meeting  of  the  stockholders  of  a  failed  bank 
after  the  creditors  had  been  paid  in  full,  for  the  purpose  of  elect- 
ing an  agent  to  whom  the  receiver  should  turn  over  the  remaining 
assets  for  liquidation  for  their  benefit  and  thus  terminate  the 
receivership.  A  meeting  was  promptly  called  in  this  case,  but  the 
stockholders  were  unable  to  agree  upon  the  selection  of  an  agent 
and  the  bank  was  continued  in  the  hands  of  the  receiver. 

To  meet  this  situation  and  any  similar  contingency,  the  Act 
of  June  30,  1876,  was  amended  by  the  Act  of  August  3,  1892, 
authorizing  the  shareholders  of  an  insolvent  bank  to  determine 
by  ballot  at  a  meeting  called  by  the  Comptroller  for  that  pur- 
pose, whether  to  elect  an  agent  or  to  continue  the  receivership 
until  the  affairs  of  the  association  were  finally  wound  up.  On 
January  11,  1893,  another  meeting  of  the  shareholders  of  this 
bank  was  held,  at  which  they  elected  to  continue  the  receivership 
until  final  liquidation. 

Ridgely's  Annual  Reports 

During  Mr.  Ridgely's  term  of  six  and  one-half  years,  he  sub- 
mitted seven  annual  reports  to  Congress,  his  first  report  covering 
eleven  months  of  the  term  of  his  predecessor,  Charles  G.  Dawes. 
In  concluding  this  report  Mr.  Ridgely  gave  credit  to  his  prede- 


ROMANCE  AND  TRAGEDY  OF  BANKING  293 

cessor  for  many  of  the  suggestions  and  much  of  the  statistical 
information  which  the  report  contains,  and  commended  him  for 
the  high  state  of  efficiency  in  which  he  found  the  Currency  Bureau 
when  he  took  charge,  and  the  thoroughness  of  its  organization. 

This  worthy  tribute  to  his  immediate  predecessor  was  char- 
acteristic of  Mr.  Ridgely's  appreciation  of  merit  and  justice,  and 
is  in  striking  contrast  with  the  attitude  of  his  successor  in  office, 
as  will  appear  later  on. 

In  addition  to  the  usual  statistical  information,  Mr.  Ridgely's 
reports  contain  many  practical  suggestions  and  recommendations 
for  improvements  in  our  banking  and  currency  laws,  and  con- 
tribute a  valuable  addition  to  the  literature  of  the  Comptroller's 
office  on  these  subjects,  particularl}'  in  respect  to  the  currency 
laws  and  their  bearing  upon  bank  panics. 

Mr.  Ridgely,  like  all  of  his  predecessors,  recognized  the  neces- 
sity for  some  important  changes  in  the  banking  and  currency 
laws,  which,  in  his  judgment,  would  have  corrected  some  of  the 
defects  in  the  statutes  and  otherwise  have  improved  the  service. 

Following  the  direction  of  the  statute,  he  submitted  in  his 
annual  reports  to  Congress  a  number  of  recommendations  for 
amendments  to  the  laws,  many  of  which  were  not  new,  but  were 
similar  in  thought  and  purpose  to  changes  suggested  from  time 
to  time  by  former  Comptrollers,  who  were  of  the  same  opinion 
as  to  the  necessity  for  such  legislation  and  therefore  his  views 
on  these  subjects  were  entitled  to  additional  weight.  But  the 
history  of  the  Bureau  shows  that  while  the  law  required  the  Comp- 
troller to  recommend  to  Congress  such  amendments  to  the  laws 
as  experience  in  their  practical  operation  and  administration  had 
shown  to  be  necessary,  very  little  attention  was  given  such  recom- 
mendations by  the  legislative  branch  of  the  Government. 

This  fact  is  particularly  exemplified  by  the  recommendations 
made  for  an  amendment  to  Section  5200  of  the  Revised  Statutes, 
in  regard  to  the  limit  of  loans  that  the  banks  might  make.  For 
more  than  thirty  years  Comptroller  after  Comptroller  recom- 
mended, not  only  once  but  repeatedly,  an  amendment  of  this  pro- 
vision of  law,  but  without  effect,  until  the  passage  of  the  Act  of 
June  22,  1906,  during  Mr.  Ridgely's  administration,  which  in- 
creased the  limit  of  loans  to  ten  per  cent,  of  the  capital  and  sur- 


294  ROMANCE  AND  TRAGEDY  OF  BANKING 

plus  of  the  bank.  It  required  over  thirty  years  to  secure  this 
amendment,  and  then  the  statute  was  not  amended  as  it  should 
have  been. 

The  most  important  of  the  amendments  to  the  law  recom- 
mended by  Mr.  Ridgely,  were  the  following: 

A  repeal  of  the  provision  of  the  Act  of  March  14,  1900,  re- 
stricting the  amount  of  national  bank  notes  of  the  denomination 
of  five  dollars  to  one-third  of  the  outstanding  circulation  of  the 
issuing  bank. 

This  limitation  had  not  worked  satisfactorily  to  the  banks  or 
to  the  Comptroller's  office,  and  was  opposed  by  the  Comptroller 
before  it  became  a  law.  After  the  bill  passed  the  House  of  Rep- 
resentatives, containing  this  restriction,  and  while  it  was  still 
pending  in  the  Senate,  the  attention  of  Mr.  Brosius,  of  Pennsyl- 
vania, who  was  then  chairman  of  the  Committee  on  Banking  and 
Currency  of  the  House  of  Representatives,  was  called  to  the 
provision  and  the  objections  thereto  set  forth.  Mr.  Brosius 
stated  that  this  limitation  was  incorporated  in  the  bill  through 
inadvertence;  that  the  intention  was  to  restrict  the  issue  of  na- 
tional bank  notes  of  the  denomination  of  five  dollars  to  one-third 
of  the  total  circulation  outstanding  of  all  the  banks,  and  not  to 
one-third  of  the  outstanding  circulation  of  each  bank. 

As  a  matter  of  fact  the  proportion  of  five-dollar  national 
bank  notes  to  the  total  national  bank  circulation  outstanding 
had  not  exceeded  thirty-one  per  cent,  since  1874,  so  that  there 
was  no  necessity  for  this  restriction  in  the  Act  of  March  14,  1900. 

Mr.  Brosius  and  a  representative  of  the  Comptroller's  office 
had  a  conference  with  Senator  Aldrich,  chairman  of  the  Finance 
Committee  of  the  Senate,  in  regard  to  this  provision,  while  the 
bill  was  still  pending  in  the  Senate,  and  the  latter  agreed  to 
correct  the  objectionable  feature  in  conference,  but  the  provision 
remained  in  the  bill  as  it  passed  the  Senate  and  so  became  a  law. 

At  the  hearing  before  the  National  Monetary  Commission  on 
December  2,  1908,  attention  was  again  called  to  this  feature  of 
the  law  and  to  the  fact  that  it  was  understood  to  have  crept  into 
the  Act  through  inadvertence.  But  Senator  Aldrich,  chairman 
of  the  commission,  stated  that  for  twenty-four  years  preceding 
that  time  the  legislation  of  Congress  had  been  framed  with  a  view 


ROMANCE  AND  TRAGEDY  OF  BANKING  295 

to  giving  to  the  silver  certificates,  to  the  greatest  extent  possible, 
the  field  for  notes  of  the  denomination  of  one,  two  and  five  dollars, 
and  he  expressed  the  opinion  that  this  policy  should  be  adhered 
to.  In  the  event  of  an  insufficiency  of  silver  certificates  of  the 
denominations  stated,  provision  had  been  made  for  the  issue  of 
United  States  notes  of  the  same  denominations. 

The  purpose,  then,  of  the  restriction  on  national  bank  notes 
of  the  five-dollar  denomination,  according  to  Senator  Aldrich, 
was  to  force  silver  certificates  of  the  smaller  denominations  into 
circulation,  notwithstanding  his  acquiescence  in  the  statement  of 
Mr.  Brosius  that  this  restriction  crept  into  the  Act  of  March  14, 
1900,  through  inadvertence.  But  whether  the  provision  was 
placed  in  the  bill  purposely  or  otherwise,  the  restriction  should 
not  have  been  made.  The  banks  should  have  been  free  to  issue 
circulation  of  any  denomination  they  desired,  and  any  restriction 
upon  their  right  or  privilege  to  do  this  simply  added  to  the  in- 
elasticity of  the  bond-secured  circulation  so  much  complained  of. 
As  a  further  means  of  increasing  the  elasticity  of  bank  cir- 
culation, Mr.  Ridgely  recommended  the  repeal  of  the  three  mil- 
lion limitation  upon  the  amount  of  bond-secured  circulation 
allowed  to  be  retired  during  any  one  month.  This  feature  of  the 
law  was  amended  during  his  administration  by  increasing  the  limit 
on  bond-secured  circulation  to  nine  millions  per  month  and  per- 
mitting so-called  emergency  circulation  to  be  retired  without 
limit. 

But  even  this  limitation  upon  the  bond-secured  circulation 
should  not  have  been  imposed.  The  banks  should  have  been  per- 
mitted to  increase  or  reduce  their  circulation  at  their  discretion. 
The  few  instances  of  abuse  which  might  have  resulted  from  this 
unrestricted  privilege  would  have  been  more  than  counterbalanced 
by  the  advantages  that  would  have  been  derived  from  the  added 
elasticity  to  the  circulation. 

Provision  for  the  consolidation  of  banks  is  another  amend- 
ment which  had  been  repeatedly  recommended  without  results 
until  November  7,  1918.  When  it  was  desired  to  consolidate  two 
banks,  the  only  means  of  effecting  the  consolidation  was  to  place 
one  bank  in  liquidation  and  for  the  continuing  association  to 
absorb  the  assets   and   assume  the  liabilities   of  the  liquidating 


296  ROIVIANCE  AND  TRAGEDY  OF  BANKING 

bank.     This  method  was   exceedingly   inconvenient   and   cumber- 
some, both  to  the  banks  and  to  the  Comptroller's  office. 

As  a  means  of  facilitating  and  extending  the  trade  of  our 
merchants  and  manufacturers  with  foreign  countries,  especially 
with  South  America  and  the  Orient,  Mr.  Ridgely  recommended 
that  national  banks  located  in  reserve  or  central  reserve  cities, 
having  a  capital  of  $1,000,000  or  more,  be  authorized  to  buy  and 
sell  foreign  exchange,  to  accept  bills  drawn  on  themselves,  pay- 
able not  to  exceed  four  months  after  sight,  to  issue  letters  of 
credit,  and  to  open  and  maintain  such  offices,  agencies  or  branches 
as  might  be  deemed  necessary  to  conduct  this  business  in  foreign 
countries  and  in  Porto  Rico,  the  Philippines,  Hawaiian  Islands, 
and  the  Panama  Canal  Zone.  This  recommendation  was  incor- 
porated in  the  Federal  Reserve  Act  of  December  23,  1913,  which 
authorized  national  banks  with  a  capital  stock  of  $1,000,000  or 
more,  with  the  approval  of  the  Federal  Reserve  Board,  to  estab- 
lish branches  in  foreign  countries  or  dependencies  of  the  United 
States. 

In  each  of  Mr.  Ridgely's  seven  annual  reports  a  good  deal  of 
thought  was  devoted  to  a  discussion  of  the  defects  in  the  national 
currency  system  and  to  suggested  remedies  therefor. 

In  his  earlier  reports  he  favored  an  emergency  currency  based 
upon  the  assets  of  the  banks,  which,  he  thought,  could  be  made 
absolutely  safe  and  immediately  available  in  times  of  stringency 
or  panic,  with  a  guarantee  fund  in  reserve  raised  by  a  tax  on  cir- 
culation. Such  circulation,  he  thought,  would  be  an  element  of 
strength  and  not  of  weakness  to  the  banks  issuing  it,  and  be 
preferable  to  any  form  of  Clearing  House  certificates  or  emer- 
gency circulation  issued  by  Clearing  Houses  or  similar  associa- 
tions, such  as  were  resorted  to  during  panics,  as  each  bank  could 
act  independently  and  quickly  meet  the  conditions  and  necessities 
in  its  own  community,  and  would  go  far  toward  preventing  emer- 
gencies from  arising  or  at  least  diminishing  their  seriousness. 

Mr.  Ridgely  thought  this  plan  would  be  the  most  simple  and 
practical  method  of  introducing  an  element  of  elasticity  into  our 
banknote  circulation  and  make  it  readily  responsive  to  the  needs 
of  the  respective  communities  in  times  of  stress  or  financial  dis- 
turbances   of    any    kind.      He   therefore    recommended    that    all 


ROMANCE  AND  TRAGEDY  OF  BANKING  297 

national  banks  which  had  been  in  operation  for  not  less  than 
two  years,  and  which  had  a  surplus  fund  of  not  less  than  twenty 
per  cent,  of  their  capital  stock,  be  permitted  to  issue  notes  un- 
secured by  bond  deposits  in  amount  not  to  exceed  fifty  per  cent,  of 
their  bond-secured  notes. 

To  protect  such  notes  he  proposed  that  such  banks  should 
be  required  to  carry  the  same  reserves  as  against  deposits,  in 
gold  or  its  equivalent,  and  be  further  protected  by  a  guaranty 
fund  of  five  per  cent.,  to  be  deposited  by  the  issuing  bank  with 
the  Treasurer  of  the  United  States  before  any  notes  were  issued. 
From  this  guaranty  fund  all  such  gold  reserve  notes  were  to  be 
redeemed  on  demand.  This  guaranty  fund  was  to  be  maintained 
by  a  graduated  tax  on  the  gold  reserve  notes,  beginning  at  a  rate 
of  not  over  two  and  one-half  per  centum  per  annum,  and  every 
bank  issuing  gold  reserve  notes  should  be  required  to  provide 
means  for  the  redemption  of  such  notes  in  every  reserve  city, 
and  at  such  other  points  as  might  be  designated,  sufficiently 
numerous  and  convenient  to  put  every  national  bank  within 
twenty-four  hours  of  a  redemption  center. 

Mr.  Ridgely's  plan  did  not  contemplate  any  change  in  our 
present  system  of  bond-secured  circulation,  but  simply  provided 
for  an  additional  issue  of  emergency  notes  based  upon  a  per- 
centage of  the  bond-secured  circulation,  with  a  guaranty  fund 
created  and  maintained  in  the  manner  hereinbefore  explained. 

In  answer  to  the  objections  raised  that  an  authorized  issue 
of  uncovered  notes  would  lead  to  inflation  of  the  currency  and 
encourage  promotion  schemes  and  stock  speculations,  Mr. 
Ridgely  contended  that  such  would  not  be  the  case,  as  specula- 
tion is  not  carried  on  through  the  use  of  actual  money.  There 
is  seldom  any  cash  used  in  such  transactions,  he  said.  Opera- 
tions in  the  stock  market  are  generally  conducted  through  loans 
and  checks  drawn  against  deposit  credits.  These  proposed 
changes  in  the  law,  Mr.  Ridgely  said,  would  not  add  to  the  loans 
of  the  banks,  nor  make  any  additions  to  their  credits,  because 
the  reserve  requirements  would  be  the  same  for  notes  as  for  de- 
posits or  credits,  and  thus  afford  no  facilities  for  stock  exchange 
or  other  speculative  transactions. 


298  ROAIANCE  AND  TRAGEDY  OF  BANKING 

In  his  last  annual  report,  Mr.  Ridgely  enlarged  upon  his  plan 
for  a  currency  reform  by  favoring  the  establishment  of  a  central 
bank  of  issue  and  reserve,  combining  in  a  measure  his  uncovered 
note  and  the  Clearing  House  certificate  plans,  as  affording  the 
best  means  of  imparting  to  our  currency  system  an  element  of 
elasticity  that  would  enable  the  banks  to  quickly  furnish  circula- 
tion in  times  of  sudden  demand  without  depleting  the  supply  of 
reserve  money.  He  regarded  the  central  bank  idea  as  the  most 
effective  and  satisfactory  way  of  supplying  a  currency  that 
would  meet  all  the  needs  of  the  situation  and  make  our  system  of 
currency  issues  and  redemptions  more  in  unison  with  the  most 
approved  and  reliable  banking  systems  of  the  world. 

He  outlined  his  plan  with  considerable  detail  as  to  the  forma- 
tion and  operation  of  the  central  bank  idea,  and  his  views  in  this 
respect  make  this  report  a  valuable  addition  to  the  literature  on 
this  subject. 

Amendments  to  the  Banking  Laws 

During  the  seven  years  that  Mr.  Ridgely  was  Comptroller 
there  were  ten  Acts  passed  by  Congress  amendatory  of  the  na- 
tional banking  laws,  as  follows : 

The  Act  of  April  12,  1902,  authorizing  a  further  extension 
of  the  charters  of  national  banks  for  a  period  of  twenty  years 
from  the  date  of  expiration  of  the  first  period  of  extension. 

When  this  Act  was  passed  there  was  some  question  as  to 
whether  the  Act  of  July  12,  1882,  authorized  a  second  extension 
of  charter,  and  the  Act  of  April  12,  1902,  was  regarded  as  neces- 
sary to  remove  any  doubt  on  this  subject. 

The  Act  of  April  28,  1902,  requiring  the  Comptroller  of  the 
Currency  to  annually  furnish  to  the  Secretary  of  the  Interior, 
for  publication  in  the  Official  Register,  a  list  of  all  employees  of 
the  Currency  Bureau,  including  the  names  of  national  bank  exam- 
iners and  their  clerks,  receivers  of  insolvent  banks  and  their 
attorneys  and  clerks,  and  all  other  persons  connected  with  the 
Comptroller's  office  in  Washington  or  elsewhere,  whose  salary  or 
compensation  is  paid  from  the  Treasury  of  the  United  States, 
or  from  the  funds  of  failed  associations. 


ROMANCE  AND  TRAGEDY  OP  BANKING  299 


reserve 


The  Act  of  March  3,  1903,  providing  for  additional 
cities,  by  extending  the  privilege  to  banks  in  cities  with  a  popu- 
lation of  twenty-five  thousand  people,  instead  of  cities  with  a 
population  of  fifty  thousand,  as  provided  by  the  Act  of  March  3, 
1887. 

The  Act  of  February  28,  1905,  providing  that  directors  of 
banks  with  a  capital  stock  of  twenty-five  thousand  dollars,  need 
own  only  five  shares  of  the  stock  of  the  association  to  become 
eligible  as  directors,  instead  of  ten  shares,  as  provided  by  the 
Act  of  June  3,  1864. 

The  Act  of  December  21,  1905,  providing  that  the  Panama 
Canal  bonds  should  have  all  the  rights  and  privileges  accorded 
to  other  two  per  cent,  bonds  of  the  United  States  in  regard  to 
the  tax  on  circulation  secured  thereby. 

The  Act  of  June  22,  1906,  increasing  the  limit  of  loans  that 
the  banks  may  make  to  an  amount  equal  to  ten  per  centum  of 
the  capital  and  surplus  of  the  association,  not  exceeding,  how- 
ever, thirty  per  centum  of  the  capital  in  any  case. 

The  Act  of  January  26,  1907,  prohibiting  any  national  bank 
ofl5cer  under  penalty  of  a  fine  of  not  exceeding  one  thousand 
dollars,  and  not  less  than  two  hundred  and  fifty  dollars,  or  by 
imprisonment  for  a  term  of  not  more  than  one  year,  or  both  such 
fine  and  imprisonment,  from  making  any  money  contribution  in 
connection  with  any  election  at  which  presidential  and  vice- 
presidential  electors,  or  a  Representative  in  Congress,  is  to  be 
voted  for,  or  any  election  by  any  State  Legislature  of  a  United 
States  Senator, 

The  Act  of  March  4,  1907,  simply  authorized  three  thousand 
additional  copies  of  the  annual  report  of  the  Comptroller  to  be 
printed,  thereby  increasing  the  number  from  ten  thousand,  as 
fixed  by  the  Act  of  January  12,  1905,  to  thirteen  thousand  copies. 

The  Act  of  March  4,  1907,  amended  the  Acts  of  June  3, 
1864,  and  March  3,  1901,  by  requiring  the  Secretary  of  the 
Treasury,  on  or  before  January  1  of  each  year,  to  publish  a  list 
of  the  securities  required  during  that  year  for  public  deposits, 
and  required  such  deposits  to  be  distributed  equitably  between 
the  different  States  and  sections. 


THE  UNIVERSITY  LIBRARY 
This  book  is  DUE  on  the  last  date  stamped  below 


H  ^  1991 


Form  L-9 
20m-l,' 42(8519) 


UNIVERSITY  OF  CALIFORNIA 


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-Kl3r The  mmfinco 

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of  banicing. 


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